Hong Kong Suffers for Its Devotion to the Peg

The link to the greenback makes the city expensive for the Chinese.

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By Bruce Einhorn, Fion Li, and Enda Curran

September 10, 2015 at 6:24 PM UTC

This article is for subscribers only.

This article is part of the September 14, 2015 issue of businessweek.

Hong Kong has pegged the value of its dollar to the greenback since 1983. The peg was meant to ensure financial stability as the city embarked on the long process of re-integrating with China. Since then its currency has been one of the most stable in the region. To lock the HK dollar’s trading range against the greenback into a narrow band, about 7.75 to the U.S. dollar, the Hong Kong Monetary Authority (HKMA) buys and sells the two currencies. Whenever the Federal Reserve raises or lowers interest rates, Hong Kong follows suit.

With Fed officials poised to raise rates, Hong Kong is caught between tightening monetary policy in the U.S. and the economic slump of its main trading partner, China. If the Fed makes a move soon, Hong Kong will have to raise interest rates even as the mainland’s slowdown puts pressure on Hong Kong wages and property prices. “It’s a double whammy,” says BNP Paribas economist Mole Hau.