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John Gong

I believe the number Hongkongers hate most right now is 7.8,  the all-too-familiar exchange ratio with the US dollar that the Hong Kong dollar has been pegged to for 28 years. This peg has been the primary culprit for Hong Kong's high-flying inflation lately. The Monetary Authority said last month that it had no immediate plans to get rid of the peg, despite growing calls to end it as the  US economy falters.
Nevertheless, people are already moving and hedging. News reports last month said hedge fund manager William Ackman was building a large position in the Hong Kong dollar  in a bet  that the Hong Kong government would eventually allow the currency to appreciate - rumoured to be by at least 30 per cent - against the US dollar.
However, I have an even  bolder plan, one I believe will resonate with a lot of people in Hong Kong. One only has to look at the number of people in Hong Kong who have crossed the border to buy property in mainland cities and now call places like Shenzhen and Shanghai home. 
In China's current account balances, there have, in recent years, been foreign exchange influxes that cannot be accounted for by regular trade alone. I suspect  much of it can  be explained by people abandoning the Hong Kong dollar and opting for renminbi assets via underground channels in southern Guangdong.
So, I say, forget about the peg issue. Why do we need the Hong Kong dollar at all, if people are deserting it in droves? What is the use of a currency whose only function  seems to be  to make people in Hong Kong poorer every day compared with their northern neighbours, who, by the way, they used to see as their poorer neighbours? Can Hong Kong live without the three banks running meaningless printing presses? When can we finally be rid of the Hong Kong dollar and use the renminbi instead? 
Adopting the renminbi as the official  currency in Hong Kong has many other benefits, aside from avoiding the slide down the  slippery slope into an economic abyss along with the Americans. 
First, Hong Kong will be free from the foreign exchange fluctuations that have historically hit the city on and off during  financial turmoil. With China's US$3trillion  in foreignexchange reserves, no one in the world right now would dare bet against the renminbi.  
Second, Hong Kong could adopt an independent monetary policy in its own interest. Right now, both the money supply and interest rate policies are constrained by the dollar peg, since the issuance of every Hong Kong dollar needs to be backed by dollar assets, and the  interest rate on the Hong Kong dollar needs to take into account the returns on dollar holdings. This effectively  gives away  Hong Kong's right to set monetary policies to the Federal Reserve in Washington, together with the seigniorage benefits accrued to Washington,  since the banks' dollar holdings are ultimately paid with goods and services by someone in Hong Kong. In simple terms, Washington is issuing the currency for Hong Kong, and  it profits from seigniorage earnings. By striking a deal with the central government,  the HKMA could retain the right to control the renminbi supply in Hong Kong and adopt independent interest rate and bank reserve policies. 
Third, adopting the renminbi as the official currency in Hong Kong would mean  the city  receives a large free cheque  - for about US$280 billion.  Why? Because, without the dollar peg, the US$280 billion in foreign currency reserves held by the Hong Kong government is suddenly not obliged to back anything.  That money could then be put to good use. 
The proposal also benefits the mainland. Without the Hong Kong dollar, there will be none of those secretive money inflows from over the border, which ultimately count as part of China's mounting foreign-reserve headache. More importantly, a yuan-denominated Hong Kong would serve as a landmark step towards China's aim of a freely convertible and internationalised currency. Hong Kong is already China's largest  renminbi offshore market. Trade volumes settled in  renminbi have been on a momentous upward trend for years. It would be natural to see the renminbi eventually replace the Hong Kong dollar. 
Finally, there's the political aspect. Some in Hong Kong are particularly sensitive to the implications of such a proposal, and would see it as breaking a long-held taboo. I imagine they would point to the part of the Basic Law that  addresses Hong Kong's constitutional right to issue its own currency. 
That's fine; the point is well taken. But my answer would be: look at the European Union. If Germany and France can bail out Greece and potentially  the other PIGS countries (Portugal, Italy and Spain), surely Beijing would do something similar if Hong Kong's adoption of the renminbi became a fiasco.
It is a Chinese tradition to burn fake money during the Ching Ming festival as an offering to our loved ones who have passed away. It's time for some activists in Hong Kong to burn some fake Hong Kong dollars in front of the HKMA building, or, better yet, learn from the Americans and dump them by the bundle into  Victoria Harbour.
John Gong is associate professor at the Beijing-based University of International Business and Economics. johngong@gmail.com



Burning issue