This is why for many years I have argued that HK should not shift from a US dollar peg to a yuan peg until the Chinese currency is “fully and irreversibly” convertible, with all capital controls removed.

Successful HK economy

HK has been successful in adapting its economy to the fixed exchange rate for over 30 years.

In the 1980s, the economy shifted from manufacturing to services as much of the former was transferred to mainland China.

In recent years, services have become an even more important component of HK’s total trade. Many of these services are provided to companies based outside HK.

Unless these externally based firms can find other providers in the region, HK is likely to maintain its competitive edge.

Moreover, the International Monetary Fund’s assessment of HK’s competitiveness last year 1 concluded that on three different criteria the HK dollar was reasonably valued.


Unless anyone can propose a currency system that is more appropriate for a small, highly open economy with large-scale free capital flows than the currency board system with a peg to the US dollar (still the major trading currency of the world), then it is better for HK to remain with the current arrangements.

1 Source: International Monetary Fund, “People’s Republic of China – Hong Kong Special Administrative Region – Staff Report,” Pages 17-18, May 2014