The IMF yesterday gave its backing to the Hong Kong dollar's peg to the US dollar, saying the exchange rate system can withstand Chinese yuan strength, helped by reforms introduced about two years ago.
The Hong Kong Monetary Authority introduced reforms in May 2005, under which the central bank pledged to buy Hong Kong dollars at HK$7.85 to prevent excessive Hong Kong dollar weakness and to buy US dollars at HK$7.75 to prevent excessive Hong Kong dollar strength.
The Hong Kong dollar is officially pegged in the middle of that range, at HK$7.800 per US dollar.
"Although the refined system has not been fully tested, it appears to be sufficiently fortified to withstand shocks as well as potentially greater yuan flexibility," the IMF said in a report, which came after discussions last month between the fund and top Hong Kong officials.
Hong Kong authorities have rejected any suggestions that the peg be abandoned, saying the tiny territory's financial stability hinges on warding off potentially destabilizing attacks by speculators.
The yuan has strengthened 3.7 percent against the US dollar since China revalued the currency by 2.1 percent in July 2005. Economists expect the yuan to continue to appreciate.
The IMF report comes as the weakening Hong Kong dollar gradually approaches the official peg rate of HK$7.800 per US dollar. That would raise prospects that the US dollar could trade on the higher side of the pegged rate for the first time since the reforms were introduced. At mid-day yesterday, it was trading at HK$7.7962.
But the yuan's gains are sapping the city's purchasing power given its heavy dependence on imports from the mainland.
The IMF noted that Hong Kong interest rates have drifted below US interest rates in recent months, a reflection of the high level of Hong Kong dollar liquidity. The IMF attributed the higher liquidity to inflows for major initial public offerings, including the US$16 billion Hong Kong debut for Industrial and Commercial Bank of China Ltd (
On the broader economy, the IMF said the impact of a yuan appreciation will depend on its impact on China's exports.
"A decline in China's export growth would lower Hong Kong's re-export growth, but would improve the competitiveness of its domestic goods and services exports," the IMF said.
A 5 percent to 10 percent appreciation in the yuan "should have a small impact on Hong Kong in the near term," the fund said.
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