Re: The Hong Kong peg?

[Rob Schaap <rws@xxxxxxxxxxxxxxxxxxxxxxxxx>]

G'day Penners,

Ignorant Questions Alert!

>Financial columnist Paul Erdman wrote,
>
>"Next to go will be the peg linking the Hong Kong dollar to the U.S. dollar
>at HK 7.74. This for two reasons. As a result of Asian devaluations now
>averaging almost 50 percent, Hong Kong's competitive position in export
>markets where its products often go head to head against goods
>produced in Southeast Asia, South Korea and Japan, has been severely
>undermined.
>
>"As if that were not bad enough for Hong Kong based businesses, now
>short-term interest rates have skyrocketed to over 10 percent as part of
>the effort to convince investors to stay in Hong Kong dollars. Both
>problems can be "cured" only if the government abandons the peg.
>
>"My guess is that this will happen within the next 30 days. The Hong Kong
>dollar will then go into free fall, sending yet another shock wave around
>the world that will hardly help financial markets from Tokyo to New
>York."

On the one hand:
I was wondering just how much of Hong Kong's economy depends on the sorts
of products Erdman is talking about.  I suspect it relies heavily on
currency transactions, and suspect that, this being the case, the process
may not be as automatic as Erdman implies.

And on the other:
And if a floating $HK does cop some pressure, is China in any position to
put a floor under it?  Surely, its own 'restructuring' is taking up a lot
of money in the short term (projected pay-offs from closing down
old/import-substitution  plant and throwing tens of millions on the slag
heap come later, I suppose - but social dislocation, the dole, supply
disruptions and the like start costing immediately).
-Furthermore, the Chinese restructuring plan was probably predicated on
projections for consumer goods exports that are now moot (given
underconsumption in the region).
-Also, I think Dennis once said China's economy is still a
disproportionately small generator of exchange anyway.
-I now take him to be also saying that a high interest rate strategy is
dangerously inhibitive for domestic business.

Apologies if this is a load of bollocks.

Cheers,
Rob.


************************************************************************

Rob Schaap, Lecturer in Communication, University of Canberra, Australia.

Phone:  02-6201 2194  (BH)
Fax:    02-6201 5119

************************************************************************

'It is questionable if all the mechanical inventions yet made have
lightened the day's toil of any human being.'    (John Stuart Mill)

"The separation of public works from the state, and their migration
into the domain of the works undertaken by capital itself, indicates
the degree to which the real community has constituted itself in
the form of capital."                                    (Karl Marx)

************************************************************************