China backs single HK currency

China pulled out all the stops yesterday to reassure the City that it would back a separate Hong Kong currency, and promised that if necessary it would use its own reserves to support the 13-year-old link with the US dollar.

In a set-piece presentation to 100 senior City figures at the Bank of England, Chen Yuan, deputy governor of the People's Bank of China, pledged China's determination to do everything it could to avoid jeopardising Hong Kong's prospects as a financial centre.

He said Hong Kong would continue in its present role, would become the most important funding centre for China, and "very likely for the Asian region as a whole".

He was backed by Joseph Yam, head of the Hong Kong Monetary Authority, who attacked half-a-dozen "highly sensationalised myths" about what China would do to Hong Kong's financial system, including allegations that it would lose its financial autonomy.

He said that, in fact, the opposite would happen, because under the terms of the transfer of sovereignty there would be "an even higher degree of monetary autonomy for Hong Kong".

Mr Chen, who was introduced to the meeting by Eddie George, Governor of the Bank of England, said the Hong Kong dollar would circulate as foreign currency on the mainland and the Chinese renminbi would be a foreign currency in Hong Kong.

The two monetary authorities would be mutually independent and the People's Bank of China, the central bank, would not set up an office in Hong Kong.

Mr Chen said China would support the currency stability of Hong Kong and was "prepared to offer liquidity support to the Hong Kong Monetary Authority for the purpose of stabilising the exchange rate of the Hong Kong dollar. We also stand ready to use our foreign reserves to support the Hong Kong dollar, if necessary".

China would not draw on Hong Kong's foreign exchange reserve fund, which backs the local currency, "in any way and for any reason". China did not have its eyes on siphoning off the resources of Hong Kong, he added.

Taking the reassurances still further, he moved to calm fears that Bank of China, the commercial bank belonging to the mainland authorities, would be allowed to carve up Hong Kong banking through special privileges. Bank of China is one of three note-issuers in Hong Kong.

Mr Chen said: "Bank of China shall not be treated more favourably than other banks. It shall not carry out any activities beyond the role of a commercial bank."

He also insisted that concerns that Shanghai would replace Hong Kong as a financial centre were groundless. Given the size of China's economy, there was plenty of room for two financial centres. It was "vital that Hong Kong remain the vibrant financial centre with its own economic system that we know now".

The eminent supporting cast on the platform included Wang Xue Bing, chairman of Bank of China, who reinforced the promise that his organisation would not seek special privileges.

Other speakers were Patrick Gillam, chairman of Standard Chartered, and Sir William Purves, chairman of HSBC, who said: "I have a feeling that we will look back on China's resumption of sovereignty in 1997 and say this was the moment when Hong Kong became truly world-beating."