HK gets prominent back-seat driver in dollar peg defense

Few managers appreciate having their predecessor chime in with tips on how to do their job. In the case of the Hong Kong Monetary Authority, it’s the agency’s most famous former boss.

The city’s de facto central bank said in a statement yesterday there’s no need for it to adjust interest rates proactively because that would spur inflows, offsetting the impacts of higher borrowing costs and stoking concerns over the city’s determination to defend its linked exchange rate.

Former HKMA Chief Executive Joseph Yam apparently disagrees. In an interview with local media published Monday, he said there’s room for the de facto central bank to adjust rates. One of the options is selling more exchange fund bills – a move that would tighten liquidity and boost borrowing costs. The benefit, he argued, was that Hong Kong property prices wouldn’t be so high if the city tracked interest rate hikes in the U.S.

Yam’s experience in managing the Hong Kong dollar makes him hard to ignore. The 69-year-old was HKMA’s first chief executive and he held the position for 16 years before retiring in October 2009. One of the most controversial episodes during his tenure was the decision to buy USD15 billion of stocks to defend the local currency during the Asian financial crisis – a move that was first criticized and then praised by former Federal Reserve Chair Alan Greenspan.

Yam is now a member of the Hong Kong government’s Executive Council, which assists Chief Executive Carrie Lam in policy making.

The current debate reflects the HKMA’s dilemma in managing the currency: while it is obliged to prevent the Hong Kong dollar from sliding beyond HK$7.85, it needs to make sure that interest rates don’t surge so quickly that it triggers a sharp correction in property prices. Borrowing costs are starting to rise, with the three-month Hibor rate on the Hong Kong dollar climbing for a third day to the highest level since January.

The Hong Kong dollar traded at HKD7.8499 per greenback as of 3:30 p.m. local time. The HKMA bought $2.4 billion of the local dollars since the currency sank to the weak end of its permitted trading range last week. Bloomberg