'No stronger link than the dollar'

Dubai: A cast-iron link with the US dollar is suitable for Hong Kong, Sir Donald Tsang, the region's chief executive, told Gulf News, "because it is important to give people the stability they want". If the US Federal Reserve then cuts interest rates, "you get inflation", he agreed, but "there is no perfect monetary policy".

He declined to give advice to the Gulf countries, facing a "similar dilemma", but said the counterparts he had met during his visit seemed to agree with him.

Hong Kong has maintained a fixed link with the US dollar at a constant parity of HK$7.8/US$ for 25 years. "Once you have done that, you have to take the rough with the smooth. When the American dollar 'goes south' our products become more competitive, but then we have inflationary pressure. In the [1997] Asian crisis, we remained locked to the US dollar and allowed the real economy to adjust in order to sustain the link."

Others may choose an 'inflation-targeting' approach instead, "but then you get pain in the system, and cannot grow as fast as you want".

As for Hong Kong's dollar peg, "I don't see any link stronger for the time being."

Tsang's six-day mission to the Gulf with a delegation of financiers and other businessmen was intended to promote "two-way traffic" in investment.

Aim

While the other members of the delegation were cutting their own deals, a key aim was to encourage Gulf investors to view Hong Kong as a natural conduit of their funds into the enormous opportunities for development in mainland China.

"We are the most effective intermediary for tapping into those opportunities," he said. Whereas some past investment into China had not always made money, Hong Kong could offer the expertise and the connections. As the number one investor in every Chinese province, "we know the system, and we are ready partners."

Tsang was sceptical about Asian decoupling from the US economy. "In a globalised setting, that's just unreal," he suggested. Yet China's GDP economic growth rate would be only moderated if there were US recession, taking three per cent from the 12 per cent it has been recording. "They are very comfortable," he said.