Whenever the Federal Reserve turns more hawkish and the cost of dollar funding soars, debate over whether Hong Kong should change its currency¡¯s peg resurfaces. The fixed exchange rate system has been around for more than four decades, with a narrow trading ban of 7.75 to 7.85 Hong Kong dollars introduced in 2005.
As the rate differential between the U.S. and China hits a record high, it¡¯s increasingly clear that this currency regime, which inevitably ties the city¡¯s lending rates to those of the U.S., is outdated and needs a revamp. The U.S. 10-year Treasury yield is flirting with 5%, while it¡¯s only a matter of time before China goes to sub-1%.
Because of the dollar peg, Hong Kong can no longer be Asia¡¯s go-to fundraising platform, eroding a key selling point for the financial center. For blue-chip companies, borrowing in the mainland has become a lot cheaper than in the city, where benchmark lending rates move in lockstep with the fed fund rate.
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.