To maintain the peg, Hong Kong’s monetary policies have effectively had to follow those of the US, which looks set to stick with its super-loose policy for some time to come as it struggles to revive its economy.

But maintaining ultra-low interest rates as its China-linked economy booms have left it with painful side-effects such as surging prices and a potentially destabilizing property bubble.

China’s growing use of Hong Kong as a test-bed to promote its yuan currency internationally have added to the guesswork over the future of the peg.

The yuan, also known as the renminbi, has appreciated by more than 7 percent since Beijing began promoting the territory as an offshore yuan hub last June, encouraging many Hong Kong depositors to switch their savings into yuan.

Standard Chartered strategists say the “end game would be the renminbi-fication of the territory” but that will take years to happen as much of the wealth in Hong Kong such as equities and property prices is still denominated in local dollars.

Any change now could lead to massive disruptions, they said. In US dollar terms, the yuan is currently trading at an 18 percent premium to the Hong Kong dollar. 

“In the meantime, the Hong Kong dollar can co-exist with an appreciating yuan and a rapidly expanding offshore yuan market,” they said in a note this week. 

Inflation has raged across Asia this year, but has been particularly acute in crowded Hong Kong as policymakers have been unable to raise interest rates like their regional peers.

Annual inflation in the former British colony moderated to 5.7 percent in August from 7.9 percent in July, its highest level since 1995, but the government said price pressures could build again in the short term, driven mostly by private housing rentals and food.

HSBC said in a recent research note that should inflation fail to normalize at a faster pace, “Hong Kong’s second key driver of growth, domestic consumption, could start to turn wobbly before the year is up.”

Despite a need to tighten super cheap lending on the mortgage front to curb home purchases and speculation, Hong Kong’s one-month HIBOR rate, a key mortgage-setting indicator, has remained very low at 0.21 percent.

Property prices have been particularly hot for luxury homes on Hong Kong island, sometimes dubbed the Manhattan of Greater China. Sharp increases have been driven by money flooding in from the West due to loose monetary policy and by aggressive mainland Chinese buying as more and more yuan pours into the city’s banking system.

Hong Kong’s Monetary Authority chief Norman Chan said he didn’t think the HIBOR rate would dip again after the US central bank offered fresh aid to the economy on Wednesday, but cheap credit will almost certainly persist in the short term.

Despite a raft of market cooling measures from the government, property consultancy Savills now ranks Hong Kong property as the most expensive in the world, a predicament that has fueled growing public resentment in the space-starved city of seven million.

Global market turmoil helped soften property transactions in July and August, but the HKMA’s Chan warned authorities were ready to cool the market further if need be.

Hong Kong’s monetary woes have begun to catch the eye of market bigwigs.

Earlier this month, activist US fund manager Bill Ackman raised eyebrows by saying he was placing what could be one of his biggest gambles ever, by betting against the dollar peg.

Ackman sees two scenarios: the peg’s demise by 2015, or a re-pegging of the currency at a stronger level against the US dollar. A re-pegging in coming years could produce a one-off gain of as much as 30 percent for the local currency, he estimated.

“I am looking for hedges, I like asymmetry. And after some digging around, I came up with this,” Ackman told an investment forum where he unveiled his strategy.

By buying relatively inexpensive call options on the Hong Kong currency, which Ackman considers highly undervalued, he said his bet could yield lucrative profits.

Another heavyweight, HSBC’s Chief Executive Stuart Gulliver, suggested in August that authorities might consider re-pegging the local greenback to a basket of currencies.

Some traders in Hong Kong say there’s been a marked pick-up in demand for these options in the wake of Ackman’s recommendation, with one-year volatilities implied by HKD option prices at their highest since the 2008 financial crisis, a near four-fold increase from the end of last year.

“We have seen an increased demand for buying options on the Hong Kong dollar,” said the head of FX trading at a European Bank in Hong Kong.

Option trading desks at banks, however, see such risks as negligible for now. They are writing such options enthusiastically to investors and collecting premiums as they don’t see an immediate re-pegging by traditionally risk-averse authorities given the current global market turmoil.

Other analysts like Albert Leung at Citi also see little likelihood of a short-term depegging, noting that the recent widening of Hong Kong dollar forward points is “more a reflection of global US dollar funding fears.”

A key leadership transition in China late next year, along with the selection of a new Hong Kong chief executive, also makes a potentially destabilizing depegging in the next year or two highly unlikely. 

In the longer term, as Hong Kong’s economy becomes increasingly interwoven with that of the Chinese mainland, particularly as a major offshore yuan center, analysts say it makes more and more sense to repeg Hong Kong’s currency to China’s.

For that to happen, however, the yuan will need to be more convertible, if not fully convertible, a prospect not likely for years, if not a decade, according to recent comments by China policy advisers.

Until then, authorities will have to tackle the economic pressures arising from the peg by other means, such as increasing land supply to cool property prices and warning banks to check credit lending.

After all, if Hong Kong could stomach a more than 70 percent drop in property prices between 1997 and 2003, there is no inclination for policymakers to abandon the peg now.

With the Hong Kong dollar pegged in a band of 7.75 to 7.85 against the US dollar, authorities have had to engage in costly interventions to maintain the peg as market forces build on the Hong Kong dollar strengthening.

However, as Hong Kong grows as an offshore yuan market — yuan deposits now make up around 10 percent of the city’s deposits base and are growing fast — this could assuage pressure on the peg by inadvertently tightening Hong Kong dollar liquidity.  

“In the long run, preference for the renminbi (yuan) might well make the Hong Kong dollar irrelevant,” strategists at Gavekal, a research consultancy house said in a recent note.

“But in the short run, this preference is providing a much-needed marginal tightening tool for the HKMA, and thus, ironically, a support for the peg.”

Rival Singapore, by contrast, has enjoyed far greater monetary flexibility by linking the value of the local dollar against a basket of other currencies, a useful tool given the city’s heavy reliance on imports.

In April, Singapore tightened monetary policy by nudging its exchange rate band upwards, allowing the currency to appreciate to record highs and mitigate commodity-driven imported inflation.

The Hong Kong dollar was pegged to the greenback in 1983 as a means to ease jittery markets as the city approached its historic transition of sovereignty on July 1, 1997, when Britain returned it to Chinese rule.

Since then, it has survived a few speculative attacks.

In 2003 and as recently as 2008 in the aftermath of the Lehman bankruptcy, the Hong Kong dollar traded at the upper end of the band and forced authorities to sell massive amounts of bills to sterilize such inflows.

For example, strong inflows led to the sale by the HKMA of a total of around 640 billion Hong Kong dollars to banks between September 2008 and December 2009, as reflected in the changes in its aggregate balance, official data showed.

Longer term, some analysts say a change to the peg is almost inevitable given a shift in global economic dynamics eastward.

“We believe the mechanisms to enhance RMB flows between Hong Kong and the onshore markets and the development of RMB-denominated assets in Hong Kong are critical in increasing the RMB’s circulation, and also the future evolution of the Hong Kong monetary regime,” Goldman Sachs said in a recent note.