With recent civil disturbances in Hong Kong in mind, Invesco Chief Economist John Greenwood debunks several commonly held beliefs of those Hong Kong/China bears speculating on the Territory’s currency.
Along with the civil disturbances that have wracked Hong Kong in recent weeks there have been many statements – some highly misleading in my view – about the erosion of the rule of law in the territory. Starting somewhat earlier in March, some prominent investors have taken large speculative positions in the financial markets based on the view that a collapse of either the Hong Kong dollar, or more broadly the Chinese economy and its RMB currency, was inevitable.
In my judgement, the basis for these speculations is almost completely groundless. The Hong Kong currency board is the most robust system of its kind in the world. It has withstood numerous attacks since it was established in its current form in 1983, and it has maintained a stable monetary environment for Hong Kong despite wide movements of the Chinese yuan and Mainland financial markets, and despite several episodes of political and financial instability. Even if capital outflows were to follow from the recent civil disturbances, the Hong Kong currency board is fully capable of handling them at the current fixed rate.
In this article I have concentrated on the economics of Hong Kong and its currency in order to address a number of commonly held belief’s held by Hong Kong/China bears and those speculating on the fate of the Territory’s currency. My critique of these ill-founded arguments is divided into three sections, each covering different areas where I believe speculators have made unjustified arguments or assertions:
The article concludes by re-stating a few key principles that underscore the strength and durability of Hong Kong’s currency board.
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