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Fri, Mar 29, 2002 - Page 19 News List

Chinese leadership's greenback-fetish worries some in HK

After the disappointing performance of the euro, Beijing wants to keep pegging Hong Kong's currency to the US dollar, but some think doing so is counterproductive


It's been nearly five years since Asia's economies fell into crisis, and one of the episode's most surprising legacies is here in Hong Kong. The city's currency remains pegged to the US dollar.

During Asia's meltdown, speculators pounded away at Hong Kong's dollar, figuring authorities would abandon the link.

Devaluations around Asia, investors assumed, would force Hong Kong to weaken its own dollar to help the economy's exports. Markets braced for the inevitable step.

It never came, for better or worse, and won't happen anytime soon. Officials here have stuck with their dollar peg not because of economic forces, but in spite of them. The strong US dollar has left Hong Kong uncompetitive in a tough global climate.

Instead of growth, Hong Kong is experiencing recession and deflation.

"The pegged Hong Kong dollar has outlived its usefulness, and the economy is paying the price for its inflexibility," says Dong Tao, chief economist for Asia outside Japan at Credit Suisse First Boston.

Hong Kong's dollar-peg fetish can be summed up with a single word: stability. Authorities here are desperate to maintain it and so is the Chinese government, which resumed control of the city in mid-1997.

As one of Asia's financial centers and the gateway to China's evolving economy, turmoil in Hong Kong is not an option for Beijing.

Hong Kong's dogged -- and some would say misguided -- defense of its dollar peg is a microcosm of sorts for China's broader economic strategy.

While there's no love lost between Washington and Beijing nowadays, the world's most populous nation is sticking with an in-the-US-we-trust policy.

"Chinese leaders respect force and admire strength," says Stephan Richter, president of Washington-based think tank TheGlobalist.com.

"For all its faults, the almighty dollar remains the strongest of the world's currencies, and China is content to keep riding its coattails."

Chinese leaders aren't altruistic -- support for Hong Kong's dollar peg benefits mainland China in a big way. It's the first line of defense for China's currency, the yuan, which also is pegged to the greenback.

At the same time, more than 20 percent of China's exports go to the US.

Another 18 percent go to Hong Kong, where they typically are exported on to North America and other dollar-bloc nations.

Given tensions and rivalries that color Sino-US relations these days, it's hardly surprising Beijing is uncomfortable about its links with the US currency. Washington's overtures toward Taiwan are but one example of the hard feelings gnawing away at relations between the US and China.

Such anxiety explains China's strong support for the euro since its introduction. Beijing, observers say, has been hoping the euro would evolve into a reserve currency and provide an alternative to the dollar. That could temper the dollar's dominance around the world.

Early this year, when euro notes and coins were circulated, Chinese Finance Minister Xiang Huaicheng moved some of the nation's vast currency reserves into euros.

That's significant, at least on the surface. After Japan, China boasts the largest hard currency reserves in the world, estimated at US$208 billion.

Things aren't completely what they seem, however.

For years, Beijing held as much as 15 percent of its reserves in deutsche marks. Since the German currency ceased to exist earlier this year, the funds would have to be converted into euros anyway. At least 60 percent of China's reserves are still thought to be in dollars.

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