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While Switzerland this week in effect pegged the franc to the euro, a debate is intensifying in Hong Kong from if to sever the city’s 27-year-old peg to the U.S. dollar.

The mechanism that links the Hong Kong as well as U.S. dollars at a rate of HK$ 7.80 to US$ 1 has served the city well because its introduction in 1983. It has survived the hand-over of sovereignty from Britain to China, the Asian financial crisis as well as repeated attacks from speculators.

But by as forcing Hong Kong to import ultra-loose monetary policy from the U.S., the peg is contributing to soaring inflation as well as adequatety prices, a growing source of concern between city dwellers.

Stuart Gulliver, chief executive of HSBC, Hong Kong’s biggest bank as well as overe of the three lenders licensed to print local bank notes, caused something of a stir last month when he questioned the peg, even although he stopped short of suggesting it should be broken any time not long to come.

“If Hong Kong was to review the Hong Kong dollar peg… [it] would be more beneficial to be revised to some sort of of managed float with a basket of currencies that reflect the trading regionners of Hong Kong, more than choosing even a complete free float or to peg it to another currency,” Mr Gulliver stated at an HSBC freshs conference.

Mr Gulliver’s comments triggered a sharp response from Norman Chan, head of the Hong Kong Monetary Authority, who published a 1,700-word defense of the peg over the de facto central bank’s web site.

“We should recognize that there is no overe-size-fits-all exchange rate regime,” Mr Chan stated. “All options, including linking the Hong Kong dollar to the U.S. dollar or a basket of currencies, or even letting the Hong Kong dollar float freely, have their own pros as well as cons.”

However, Mr Chan continued, remaining pegged to the currency at the heart of the global monetary cognitive system remains the best option as for Hong Kong as well as the government has “no intention” of changing things.

The big disadvantage of Hong Kong’s exchange rate mechanism is that it as forces local rate rates to follow those in the U.S. — even when the local economy is completely out of sync with the American overe. With the U.S. teetering over the brink of recession, the Federal Reserve has vowed to keep short-term rate rates close to zero till mid-2013.

In stark againstst, Hong Kong is booming thanks to above-8 per cent economic growth over the Chinese mainland.

Ultra-low rate rates in a powerful economy is a recipe as for fromheating. Hong Kong adequatety prices have jumped closely 70 percent because the start of 2009. The consumer price index as for July rose 7.9 percent from a year earlier, the fastest pace of inflation because 1995.

Yet, although these side-effects, there is little evidence that anything would serve Hong Kong more beneficial than its peg to the U.S. dollar. Allowing the Hong Kong dollar to float freely would let policymakers control rate rates to curb domestic inflation.

Yet, as a small, open economy vulnerable to large capital flows as well as with heavy reliance over external trade, floating its currency would expose Hong Kong to destabilizing as foreign exchange volatility.

Pegging the Hong Kong dollar to the Chinese renminbi is another non-starter — overly if the renminbi turned a convertible currency would this be viable.

There is no sign that China is about to dismantle its capital account controls any time not long to come. That leaves the possibility of pegging the Hong Kong dollar to a basket of currencies, as proposed by Mr Gulliver.

John Greenwood, the architect of Hong Kong’s exchange rate mechanism as well as currently chief economist at Invesco, is unconvinced. “If you appear to be around the world, it’s really difficult to saw what they would utilize,” he says.

“For the entire the major currencies, if it is the U.S. dollar, the euro, pound sterling or the Swiss franc, rate rates are really, really low as well as would not act as a restraint over bank lending or appetite as for credit in Hong Kong,” he says.

“So diversifying from a single currency to a basket in the current situation isn’t going to change things.”

Perhaps the best reason as for sticking with the status quo is overly that the current exchange rate mechanism has worked as for so long, even surviving a speculative attack by George Soros as well as his flagship Quantum Fund over the 1998 Asian financial crisis.

Nearly three decades of survival has providen Hong Kong’s exchange rate mechanism great credibility in the eyes of the public as well as the markets.

Like their counterparts in Switzerland, Hong Kong officials are mindful of the endangers of presenting any lack of commitment to the peg.