HKMA Head Source of Drive to Make H-A Shares Convertible?

Joseph Yam, the head of the Hong Kong Monetary Authority (HKMA), Hong Kong's Ben Bernanke, now looks set to retire from his position in 2009, according to the South China Morning Post (SCMP) newspaper. Mr. Yam became head of the HKMA in 1993 and has always been a strong supporter of the Hong Kong dollar peg, which fixes the value of the Hong Kong dollar to the US dollar. Government sources indicate that Mr. Yam's retirement is merely a reflection of the government's desire that he follow the mandatory civil servant's retirement age of 60, which Mr. Yam recently reached, although the HKMA has no formal retirement rules. Many theories are now being bandied about as to what the real reason is for his retirement, since it appears unlikely he retired of his own volition. The most interesting has been proposed by Mr. Jake van der Kamp, a columnist for the SCMP.

Mr. van der Kamp proposes that Mr. Yam ran afoul of more senior government officials, and perhaps even China's central government, as he was a key driver of developing a fully interchangeable H and A share market. Those officials may have found his aggressive promotion of H-A share convertibility too de-stabilizing for Hong Kong because: 1) it would open up China's capital account, 2) it may have caused excessive speculation in Hong Kong shares, 3) the Hong Kong dollar is under pressure to strengthen, 4) Hong Kong dollar interbank rates have subsequently become more volatile and 5) he may have overstepped his bounds by delving into policy issues above his pay grade. If Mr. Yam was the driver of H-A share convertibility, and he is now out, then perhaps H-A share convertibility is now an even more remote possibility. If Hong Kong investors have been driving up share prices for this reason, they may be disappointed.

For the sake of full reporting, we list below other potential reasons that have been floated for Mr. Yam's departure:

  • He doesn't get along with Hong Kong's Chief Executive Donald Tsang Yam-Kuen and Mr. Tsang wants to replace him with an ally, Norman Chan Tak-Lam, who has been impatiently waiting for the job.
  • As a staunch defender of the Hong Kong dollar peg, he would need to be removed if a plan to re-peg the Hong Kong dollar to the Chinese Renminbi were to be pursued.
  • The Chief Executive of the HKMA should have a fixed term. Mr. Yam's time at the HKMA has been too long and his retirement will pave the way to moving the role into a fixed term role, perhaps needing a stamp of approval from Hong Kong's legislature.

As to his replacement, the Red Cat Journal supports Mr. van der Kamp's suggestion. Turn the role over to a committee and a technician, given that under a peg the HKMA's buy and sell actions are more or less automatically determined by the market. Perhaps Hong Kong could be the first place to have monetary policy run by a "dentist", as was John Maynard Keynes inclination. And some of the savings from Mr. Yam's HK$9 million salary (almost US$1.2 million) could then be put to better use!