Hong Kong's dollar peg is straining under the global liquidity glut. The territory's monetary authority bought U.S. dollars on four separate occasions in the past week to prevent the currency from rising beyond the top of its permitted trading range. But it's hard to say if abandoning the 29-year-old fixed rate regime would have made it any easier for Hong Kong to cope with money-printing in the West.
There's no question that Hong Kong is feeling the effects of low interest rates. The prices of the cheapest apartments on Hong Kong island have risen 60 per cent in four years. The strains have prompted calls for Hong Kong to adopt Singapore's more flexible currency: the Singapore dollar has appreciated 21 per cent against its U.S. counterpart since March 2009.
Yet this flexibility has granted Singapore little immunity from quantitative easing. The island-state's residential property prices have risen 56 per cent since the second quarter of 2009. And it isn't just asset prices that are proving hard to control. Inflation in Singapore quickened to an unexpectedly strong 4.7 per cent in September, faster than the 3.8 per cent pace at which consumer prices rose last month in Hong Kong.
Both Singapore and Hong Kong have tightened restrictions on property loans, putting limits on who can borrow, how much they can borrow, and for how long. Tellingly, the most recent lending curbs were introduced after the U.S. Federal Reserve announced its third round of quantitative easing.
But these so-called "macro-prudential" measures tend to offer only temporary respite from ultra-cheap capital: Singapore's mortgage interest rates are currently about 1 per cent a year. Unlike larger economies such as China and India, Hong Kong and Singapore do not control domestic interest rates.
If the U.S. Federal Reserve feels compelled to conjure up a fourth and a fifth instalment of quantitative easing, Hong Kong and Singapore may be tempted to impose more stringent controls.
For now, though, these small and open Asian economies will probably just have to bear the pain and carry on. In an environment of low global GDP growth, it's just too dangerous to give up an established monetary regime and switch to a different one that could bring new threats.