Finance Blog number 1

Norman Chan, named today as the new head of the Hong Kong Monetary Authority, vowed to maintain the local currency’s peg to the U.S. dollar, while expanding business in Chinese yuan in the city.

Chan, who will replace Joseph Yam on Oct. 1, will be paid 32 percent less than his predecessor, taking home HK$6 million ($774,179) a year. That’s more than three times the salary of U.S. Federal Reserve Chairman Ben S. Bernanke last year.

The 54-year-old Chan takes over the city’s de-facto central bank at a time when the yuan’s 21 percent appreciation over the past four years against the greenback is testing the Hong Kong dollar’s 26-year-old fixed exchange rate. The authority is also considering tougher regulation of financial products after a scandal over the sale of securities linked to the failed Lehman Brothers Holdings Inc.

“There’ll be no change near-term to the peg,” said Callum Henderson, Singapore-based head of currency strategy at Standard Chartered Plc. “It’s served Hong Kong very well and will continue to do so for the foreseeable future. Once the yuan is fully convertible Hong Kong can think about an adjustment to the policy but that’s still many years away.”

Chan, a former deputy at the central bank who oversaw reserves management and international affairs, will return after four years at the office of Hong Kong’s leader, Donald Tsang. Yam, who will step down on Oct. 1, will hand over management of a $207 billion currency reserve pool, the world’s eighth largest.

“It’s crucial that the HKMA strikes to enhance the competitiveness of Hong Kong’s financial services sector,” Chan told a press briefing. “In this regard the development and deepening of yuan business in Hong Kong is an important aspect. I shall use my best endeavors to maintain Hong Kong’s position as a premier financial center in Asia.”

The Peg

Chan joined the civil service in 1976 after graduating from the Chinese University of Hong Kong with a bachelor’s degree in sociology. He was an executive director of the HKMA when it was established with Yam at the helm in 1993 and became deputy chief executive in 1996.

Yam, 60, is Asia’s longest-serving central bank chief, guiding the HKMA through Hong Kong’s final years as a British colony into its first 12 years of Chinese sovereignty. He started his career as a government statistician in 1971.

As head of the HKMA, Yam consistently backed the Hong Kong dollar’s peg to the U.S. dollar. The city’s currency was kept at HK$7.8 versus the greenback since 1983 and from 2005 was allowed to trade in a range of HK$7.75 to HK$7.85. It traded at HK$7.7501 today. Chan told a press briefing he had no plan to change the peg.

Financial Crisis

Yam steered Hong Kong through the late 1990s Asian financial crisis, responding to a speculative attack on the Hong Kong dollar with $15 billion in stock purchases, and other troubles including the outbreak of SARS in 2003.

The HKMA has injected more than HK$195 billion this year to maintain the currency peg as funds pour into the city. The aggregate balance, a measure of liquidity in the banking system, climbed to a record HK$257 billion on May 19 faxless payday loan.

Hong Kong may widen the local currency’s trading band versus the U.S. dollar in the next one to two years, enabling it to appreciate as China’s economic growth lures investment to the city, according to ING Groep NV.

“They’ll realize they’re fighting a battle that’s really leaning against a structural wind, not just a cyclical wind,” said Tim Condon, chief Asia economist at ING in Singapore. “They’ll determine that that’s not a fruitful activity and respond like in May 2005, when they first widened the band.”

Hang Seng

Hong Kong has a “distinct advantage” in helping China become more important in the global financial system, Yam said June 18. The People’s Bank of China approved on July 2 a trial for five Chinese cities to use yuan for settling cross-border trade with Hong Kong, encouraging companies to replace the U.S. dollar in their transactions.

HSBC Holdings Plc and Bank of East Asia Ltd. won approval in May to be the first foreign banks to sell yuan bonds in Hong Kong from Chinese regulators. Yam said July 9 he hopes to have some of the city’s stocks denominated in China’s currency, according to The Wall Street Journal.

Hong Kong’s Hang Seng Index of shares has underperformed this year, rising 31 percent, compared with a 75 percent jump in the Shanghai composite index. The city’s gross domestic product fell 4.3 percent in the first quarter from the fourth, the most since at least 1990, official figures show.

Lehman Collapse

A blot on Yam’s legacy was a scandal involving so-called mini-bonds backed by Lehman. Investors, many of them elderly, say the bonds were marketed by banks as safe investments when in fact they were structured products that plunged in value after Lehman declared bankruptcy late in 2008. Critics pointed the blame largely at what they called lax regulation.

Regulators should “strike a delicate balance” between protecting investor interests and developing different kinds of financial products, Chan told the press briefing.

Yam’s compensation attracted criticism. In 2008, he received HK$11.9 million, compared with Fed Chairman Bernanke’s $191,300 and Bank of England Governor Mervyn King’s 283,564 pounds ($462,000) in 2007. Central Banking Publications described Yam last year as the highest-paid central banker in the world.

Albert Ho, a lawmaker and Chairman of the Democratic Party, said Chan’s appointment lacks “credibility,” Radio Television Hong Kong reported on its Web site. Chan was picked by a three- man committee consisted of former HSBC Holdings Plc chairman John Bond and Li & Fung Ltd.’s founder Victor Fung, Hong Kong’s Financial Secretary John Tsang told reporters.

“Chan’s strong connections on the mainland will enable the HKMA to further enhance its close relationship with the regulatory authorities there,” Margaret Leung, Chief Executive of Hang Seng Bank Ltd., the biggest Hong Kong-based lender by market value, said in an e-mailed statement.

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