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As rising US interest rates and economic pressures fuel speculation over Hong Kong’s monetary policy, the chief architect behind its currency’s peg to the US dollar defends the link as the city’s best option and warns that alternative proposals would introduce greater risks and instability.
Hong Kong’s Linked Exchange Rate System has been in place since 1983, ensuring currency stability through global financial crises, economic shifts and geopolitical tensions; yet, with high mortgage rates, capital outflows and slowing economic growth, some are questioning whether it is time for a monetary policy shift, states a recent article published by Chartwell Institute titled, Why the Debate Over Hong Kong’s Dollar Peg Misses the Point.
In the article, featuring an interview with economist John Greenwood, the chief architect behind Hong Kong’s Linked Exchange Rate System, he dismantles common misconceptions about the peg and outlines why alternatives such as a renminbi ( RMB ) peg, a currency basket or a free-floating exchange rate would likely do more harm than good, by introducing greater risks and instability. Instead, he argues the city should “prioritize a steady and predictable monetary system”.
“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.”
Among the alternatives frequently discussed are a:
Greenwood dismisses these options as unrealistic and destabilizing. “If the Hong Kong dollar was pegged instead to the Chinese RMB, some might argue that financial conditions in Hong Kong and China would be more closely aligned. However,” he warns, “in China’s state-dominated system, there are anomalies and distortions that would spill over to Hong Kong.”
A currency basket would create further uncertainty. “Baskets of currencies have two huge disadvantages,” Greenwood explains. “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.”
As a Hong Kong-based think-tank dedicated to financial education and policy analysis, Chartwell Institute, it says, believes monetary policy should be guided by stability and long-term resilience, rather than reactive adjustments to short-term economic pressures. Greenwood’s insights align with the institute’s position that the peg remains the strongest foundation for Hong Kong’s long-term financial future.
“The real question is not whether the peg is flawless, it is whether any alternative would be better,” Greenwood states. “And in Hong Kong’s case, the answer is no.”
