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LCQ3: Linked Exchange Rate System

     Following is a question by the Hon Albert Chan and a reply by the Financial Secretary, Mr John C Tsang, in the Legislative Council today (November 14):


     The exchange rate of Renminbi (RMB) against Hong Kong Dollars (HKD) has hit record high time and again in recent months and, at the same time, funds amounting to tens of billions of HKD have flowed into Hong Kong, causing the exchange rate of HKD against the United States (US) Dollars (USD) to touch the strong-side Convertibility Undertaking on several occasions.  As such, the Hong Kong Monetary Authority injected funds to buy up USD by selling HKD a number of times, so as to maintain the linked exchange rate.  Quite a number of people have pointed out that one of the major reasons for the inflow of funds is the Linked Exchange Rate (LER) System which makes it impossible for HKD to appreciate, and the inflow of funds in turn is the major cause for the asset bubbles, nullifying the anti-property speculation administrative measures.  They have therefore proposed that in view of the continuous appreciation of RMB and continuous depreciation of USD, the authorities should not maintain the LER System anymore but should allow HKD to appreciate.  In this connection, will the Government inform this Council:

(a) of the reasons for continuing to maintain the LER System at present; whether it has assessed the negative impact of maintaining such System on the economy of Hong Kong; if it has, of the details; if not, the reasons for that;

(b) whether measures are in place to alleviate the negative impact of the continuous price rises caused by the continuous depreciation of HKD against RMB on the economy of Hong Kong; if so, of the details; if not, the reasons for that; and

(c) whether it has assessed the impact of delinking HKD with USD on the economy of Hong Kong; if it has, of the details; if not, the reasons for that; and whether the authorities will consider abolishing the LER System in the light of the current economic situation in Hong Kong; if so, of the details; if not, the reasons for that?



      The Linked Exchange Rate System (LERS) has been the cornerstone of Hong Kong's monetary and financial stability in the past three decades.  Hong Kong has neither the need nor the intention to change the LERS.

     My four-part reply to the questions is as follows:

     First, we have been assessing the impact of the LERS on the Hong Kong economy.  The results are that for Hong Kong as a small and open economy and an international financial centre, where economic growth is driven mainly by external factors, the LERS is the most appropriate system that serves the long-term interests of Hong Kong.  Indeed, the LERS has helped Hong Kong weather numerous financial crises, maintain monetary and financial stability through various economic cycles and sustain economic development.

     Second, the LERS is not the main cause of fund inflows into Hong Kong dollar.  Amid ample global liquidity, other currencies in the Asian region have been facing upward pressures in the first three quarters of this year, with their exchange rates against the US dollar rising by 2 per cent to 6 per cent.  This notwithstanding, their foreign reserves went up by 3 per cent to 9 per cent, representing some 4 to 16 billion US dollars.  This reflects that economies which adopt an exchange rate regime different from the LERS are also faced with fund inflow pressures.

     Third, asset price inflation is not solely driven by fund inflows.  Taking the equity market as an example, economic growth and prospects for future profitability are also important factors affecting the performance of equity prices.  As for property prices, factors such as interest rates, demographic structure, land and housing supply as well as household income likewise have a role to play.

     Fourth, neither the LERS nor the appreciation of Renminbi exchange rate is the main cause for pushing up inflation in Hong Kong.  The increase in the inflation rate in recent years has been mainly driven by the surge in global commodity prices, in particular, food prices.  In fact, the Hong Kong dollar depreciated by 4.7 per cent against the Renminbi in 2011, whereas the global commodity prices increased by 26 per cent over the same period.  As global commodity prices have stabilised to some extent, inflation has gradually gone down from 5.3 per cent in 2011 to 4.2 per cent in the first nine months of 2012.  It should be noted that neighbouring economies, which adopt different exchange rate systems, have encountered significant inflationary pressures as well in recent years.  For example, the inflation rate in Singapore in 2011 is 5.2 per cent, which is similar to that in Hong Kong.  While the Singaporean dollar appreciated by more than 5 per cent against the US dollar in the first nine months of this year, the average inflation rate of Singapore over the same period is 4.8 per cent, which is even higher than that of Hong Kong.  As such, neither the LERS nor the appreciation of Renminbi exchange rate is the main reason for pushing up inflation in Hong Kong.

     Thank you, President.

Ends/Wednesday, November 14, 2012
Issued at HKT 14:55


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