Rise in Hong Kong RMB deposits reignites peg debate

Renminbi deposits in Hong Kong banks more than doubled to a record US$22 billion in the last six months, Bloomberg reported. This growing demand for the Chinese currency has raised questions as to whether the Hong Kong dollar’s 27-year peg to the US dollar should be scrapped in favor of a link to the renminbi. The US dollar peg has made Hong Kong’s currency Asia’s worst performer of 2010. In contrast to the US, Hong Kong’s unemployment is the lowest since 2008 and real estate values have jumped 50% since the start of 2009. John Greenwood, architect of the peg, maintains that the US dollar is still the most appropriate anchor currency, citing the renminbi’s lack of convertibility and restrictions on sovereign debt holdings. But others are calling for a rethink, pointing to Hong Kong’s increased integration with the mainland and that US quantitative easing is incompatible with the territory’s growth and inflation outlook.