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Why the Debate Over Hong Kong’s Dollar Peg Misses the Point
By Chartwell Institute

John Greenwood

Hong Kong’s monetary policy has been tied to the U.S. dollar since 1983 under the Linked Exchange Rate System, which means interest rates rise and fall in lockstep with the Federal Reserve. With borrowing costs elevated, concerns have resurfaced over whether this arrangement is holding back the city’s economy, particularly the property market, which has long been a key driver of wealth. Some question whether Hong Kong should adjust its currency policy to allow for greater flexibility.

While frustrations over high interest rates and economic pressures are understandable, these arguments often miss the bigger picture. We believe the peg is not just about interest rates; it is about long-term financial stability. It has provided Hong Kong with a level of economic predictability that few other financial hubs can match, shielding the city from currency volatility and inflation spikes.

To explore this issue in greater depth, Chartwell Institute spoke with John Greenwood, the economist widely regarded as the chief architect of Hong Kong’s dollar peg. His insights align with our view that the peg remains Hong Kong’s best option. He also addresses common misconceptions about the system and explains why, despite short-term pressures, the alternatives would introduce far greater risks and uncertainties.

“Every economy must choose either to operate independently with its own monetary policy or to hitch itself to another economy by means of an exchange rate peg or a currency basket of some sort,” Greenwood explains. “For a small open economy like Hong Kong, choosing to operate independently is not a panacea.”

Before the peg was introduced in 1983, the Hong Kong dollar experienced sharp exchange rate fluctuations, which led to inflation, financial instability, and uncertainty for businesses and investors. Greenwood recalls that period as a painful lesson in the risks of an unanchored currency. “Under such an independent system, every minor political or economic event would be reflected in potentially wide movements of the exchange rate, inflation, and ultimately interest rates,” he says.

Some argue that abandoning the peg would allow Hong Kong to set its own interest rates, but Greenwood believes this idea overlooks the realities of global capital flows. A floating Hong Kong dollar would be subject to speculation and external shocks, leading to even greater uncertainty in interest rates and monetary conditions. “Every time there was a political or economic event, the exchange rate would become a major source of instability,” he warns.

Others suggest pegging the Hong Kong dollar to the Renminbi, but Greenwood sees this as an impractical solution. The Renminbi is not fully convertible, and China’s financial system operates under different regulations and state controls. He argues that “if the Hong Kong dollar was pegged instead to the Chinese Renminbi, some people might argue that there would be a closer alignment between financial conditions in Hong Kong and China. However, in China’s state-dominated system, there are anomalies and distortions that would spill over to Hong Kong.” He also points out that the ups and downs of China’s economy, such as the current mainland property downturn, would have an even larger impact on Hong Kong if such a peg were adopted.

A currency basket, similar to Singapore’s system, is another option that has been proposed. However, Greenwood sees this as adding more complexity and reducing transparency. “Baskets of currencies have two huge disadvantages. First, they are always subject to manipulation. Second, they forfeit the simple attractions of a single currency peg, as interest rates can no longer be directly linked to those in another currency,” he explains. Even adopting a dual currency peg, such as one tied to both the U.S. dollar and the Renminbi, would introduce difficulties in determining the appropriate weighting and create uncertainty in monetary policy.

One of the strongest arguments for the peg is its track record of resilience. Over the last four decades, the peg has survived numerous financial crises, U.S. China tensions, and global economic shocks. “Tensions from U.S. China trade disputes have already arisen, but these have not so far undermined the HKD peg,” Greenwood notes. He adds that the system withstood previous economic shocks, including the inflationary period of 1988 to 1990 in China, the 1997 Asian Financial Crisis, and the global financial turmoil of 2008.

Concerns have also been raised about Hong Kong’s shrinking fiscal reserves, with some questioning whether the government has enough resources to defend the peg over the long term. Greenwood acknowledges that reserves have been used to support the economy in recent years but does not see this as a systemic risk. “If this situation continues, will the reserves that also back the currency be threatened? In my view, the Hong Kong authorities would start to take action well ahead of the situation becoming critical. The fundamental soundness of the currency reserves and therefore the currency board mechanism would be kept intact,” he explains.

While economic cycles bring challenges, Greenwood argues that the peg provides Hong Kong with the stability it needs to remain a global financial hub. “No single solution is necessarily right for all time, but it would be destabilizing to switch from one system to another whenever a slightly adverse wind was blowing,” he says.

At Chartwell Institute, we believe that the peg has played a critical role in shaping Hong Kong’s financial landscape, and we see no compelling reason to abandon it. The system is not perfect, no monetary framework is, but it has proven its value through four decades of economic cycles. As Greenwood puts it, “the real question is not whether the peg is flawless, it is whether any alternative would be better. And in Hong Kong’s case, the answer is no.”

Instead of debating whether to change the system, Hong Kong should focus on strengthening its position as a global financial hub. That means enhancing its role as a capital market, attracting more investment, and ensuring that businesses and investors continue to have confidence in its financial system.

For those who want to explore this issue further, please see below our full Q&A with John Greenwood. His insights provide a valuable perspective on why the peg remains essential and why resisting the temptation to fix what is not broken is the best path forward. For a deeper analysis, see Chapter 8 of his book, Hong Kong’s Link to the US Dollar, titled “Why the HK$/US$ Linked Rate System Should Not Be Changed.” Originally written in November 1984, the arguments remain just as relevant today.



Exclusive Q&A with John Greenwood, OBE, IMM Ltd.


Chartwell Institute: The Hong Kong economy is deeply influenced by the dollar peg - from local consumption, where the strong Hong Kong dollar discourages spending, to the property market, which is burdened by high mortgage rates, and the city’s declining competitiveness in lending and fundraising. Considering these challenges, do you think it’s time for Hong Kong to reconsider the dollar peg?

John Greenwood: Every economy must choose either to operate independently with its own monetary policy or to hitch itself to another economy by means of an exchange rate peg or currency basket of some sort. Each of the “challenges” listed above is directly or indirectly a temporary consequence of Hong Kong’s choice to tie its currency and its monetary policy to the US dollar.


Those who make these complaints are two-faced. They are typically business or mortgage borrowers who want lower interest rates or who want the local currency to depreciate to give them a competitive advantage. Yet none of them would want the higher inflation that a declining currency value would bring, since that would imply higher interest rates.


For a small, open economy like Hong Kong, choosing to operate independently is not a panacea. Hong Kong learned that lesson very painfully in the period leading up to October 1983 when the peg was first adopted. Under such an “independent” system, every minor political or economic event would be reflected in potentially wide movements of the exchange rate, inflation, and—ultimately—interest rates.


Having chosen to fix its currency to the US dollar since 1983, Hong Kong has in effect avoided many of the major disadvantages of a freely floating currency but has had to tolerate the relatively minor disadvantages of a pegged rate. Currently, the US dollar link has some disadvantages, but in the Asian region over the 41 years since the Linked Exchange Rate System (LERS) was implemented, only the Singapore dollar and the HK dollar have kept pace with the greenback. This has given Hong Kong a low average inflation rate over the entire period.


While it is true that no single solution is necessarily right for all time, it is also true that it would be destabilising to switch from one system to another whenever a slightly adverse wind was blowing. So just because there are some adverse winds blowing currently does not mean it is time to ditch the Linked Exchange Rate System.




Chartwell Institute: The Hong Kong economy is increasingly tied to China’s growth. Do you think the peg to the US dollar is limiting Hong Kong’s ability to better align its currency policies with the economic conditions in mainland China?

John Greenwood: No. Hong Kong is in the position of a state of the United States with respect to financial conditions (interest rate levels, credit growth, etc.), but with respect to its output (real GDP, importance of different sectors), local Hong Kong factors—such as the skills and aptitudes of the people, or regulations affecting markets—play the leading role.


For most of its history, this combination of global and local factors has enabled Hong Kong to exploit its USP (or unique selling point) to operate as a stepping stone or doorway between China and the rest of the world.


If the HK dollar were pegged instead to the Chinese Renminbi (not strictly feasible or advisable since the Renminbi remains non-convertible), some might argue that there would be a closer alignment between financial conditions in Hong Kong and China. However, in China’s state-dominated system, there are anomalies and distortions that would spill over to Hong Kong.


Also, given the different skills of the Hong Kong and Mainland populations, and the differences between Hong Kong and mainland Chinese laws and regulations, there would still be significant economic and financial divergences. Moreover, the ups and downs of China’s economy—such as the current mainland property downturn—would have an even larger impact on Hong Kong.




Chartwell Institute: Hypothetically, if the government were to decide to unpeg from the US dollar, what do you foresee happening in the short and long term? How do you think the city could manage a transition away from the dollar peg without triggering market speculation or a financial crisis? What conditions would make this shift both politically and economically feasible?

John Greenwood: First, let me state clearly that I do not think that unpegging the HKD from the USD is a good idea.


If, hypothetically, such an ill-advised plan was embarked upon, the planners must (a) have a clear blueprint of the system that would replace the US dollar (see question 4 below), and (b) a well-developed plan to ensure the transition occurs smoothly. The available options are essentially two: shifting to an alternative external anchor (fixed to another currency, or to a basket of currencies) or shifting to an internal anchor.


In the short term, managing such a transition without triggering speculation would mainly require a high degree of transparency (such as when the Convertibility Undertakings for the HK$/US$ were progressively introduced in 1999–2005). For example, a clear statement on the planned change in the composition of the reserves backing the currency would be essential. In this way, market participants would understand the endgame, and the incentives to speculate would be minimised.


In the longer term, transparency would continue to be key, but the authorities would need to work hard to persuade market operators that no further changes were in the pipeline.




Chartwell Institute: What would potentially be the best alternative to the US dollar? A peg to the Renminbi, a basket of currencies like Singapore’s system, or something entirely different?

John Greenwood: As I said in answer to question 3, I do not favour any switch away from a US dollar-linked system.


In the world of economic theory, there are only two types of currency systems:


1. Adopting an internal anchor (e.g. an inflation target) which allows the local unit to float freely or be managed against other currencies.


2. Maintaining an external anchor , which allows three options: a USD peg, a peg to another currency, or a peg to a multi-currency basket (such as the SDR or an undisclosed basket like Singapore).

The choice among these options is determined by a variety of political, geographic, historical, institutional, and financial considerations.


• Option 1: In my opinion, the USD peg is still by far the best option for Hong Kong.

• Option 2: If another currency were to be adopted as the anchor, it would need to be freely convertible, widely used in trade and capital transactions, and likely to have a low long-run average inflation rate.

• Option 3: Adoption of a basket has major drawbacks, including susceptibility to manipulation and increased complexity in monetary policy.




Chartwell Institute: Over the past 40 years, the peg has been seen as a pillar of Hong Kong’s financial stability. In your view, what would be the most significant risks to the peg’s continued success, especially amid external pressures like US- China tensions and regional economic volatility?

John Greenwood: It should be clear from my answers above that any risks to the continued success of the HKD link to the USD have not derived from the mechanism of the LERS itself and are unlikely to do so in the future.


Any existential risks to the HKD currency board system will derive from one of three sources:


1. The economic circumstances of the anchor currency country (the United States).

2. The economic or political circumstances of Hong Kong’s major economic neighbour and sovereign power (Mainland China).

3. The financial situation in Hong Kong itself.


So far, tensions from US-China trade disputes, past episodes of inflation, and significant interest rate divergences have not undermined the HKD peg. Some concerns have arisen over Hong Kong’s fiscal reserves, but in my view, the authorities would act well in advance of any critical situation to maintain the peg’s integrity.


In short, it would take an extremely drastic situation—such as a geopolitical crisis—for the peg to be seriously threatened. In the meantime, I believe the HKD peg to the USD will continue to contribute to Hong Kong’s long-term financial stability.