The Costs and the Benefits of Hong Kong’ Currency Board System

Topics: Inflation, Currency, United States dollar Pages: 7 (2379 words) Published: May 27, 2012
The costs and the benefits of Hong Kong’ currency board system

A e f g w se f s f s f s f s f s f s f s f s f s f s f
You Zhang
Introduction S b c d e f g w se f s f s f s f s f s f s f s f s f s f s f s f s Hong Kong, a province in the west-east of China, has developed from a small fishing community into an international city in modern times which is contributes to the economic policy as well as political policy. S b c d e f g w se f s f s f s f s f s f s f s f s f s f s f s f s The currency board system was first introduced in the British colony of Mauritius in the year of 1849 and Hong Kong introduced this system in 1983. The currency board system comprises the currency board, commercial banks, and other financial institutions. It differs from the central bank. A central bank is a monetary authority that has discretionary monopoly control of the supply of the reserves of commercial banks and a currency board is a monetary institution that issues notes and coins (and, in some cases, deposits) fully backed by a foreign "reserve" currency and fully convertible into the reserve currency at a fixed rate and on demand. S b c d e f g w se f s f s f s f s f s f s Does the economy of Hong Kong benefits from the currency board system? How much does the system contribute? In this essay, we are going to start from the monetary systems in Hong Kong’s history. The second part is the theoretical analysis on advantages and disadvantages Hong Kong’s currency board system. The experience Hong Kong’s currency board system had are going to be discussed in part three a. A conclusion will be draw at the end. History S b c d e f g w se f s f s f s f s f s f s f s f s f s f s f s f s Monetary policy in Hong Kong has been made to construct a stable and sustainable economic system for more than one hundred fifty years. Looking back at the history of Hong Kong’s economic system, this task appears not an easy one. Tracing back to 1841, when the British colonized Hong Kong, China’s monetary system operated on two levels: the first one is using copper, bronze or iron coins for the smaller daily transactions; the other way is using silver ingots for larger business transactions, revenue payment, wealth storing. Additionally, Spanish and Mexican silver dollars were used for international trade. The colony government in Hong Kong tried to promote the British pound as official currency. However, as Hong Kong is an international trade centre, in a special environment, a few currencies became tender, including the silver dollar, the Indian rupee and the Chinese cash. On the contrary, the British pound was unfamiliar to the public and short of supply. For those reasons, the early colony government found it unrealistic to collect tax revenue in sterling, and finally declared the silver dollar to be the only legal tender in 1863. The silver standard became the basis of the Hong Kong’s monetary system until 1935. Significant fluctuations in the value of silver against gold gave Hong Kong a variable, and often volatile, exchange relationship with the gold-based currencies, such as the pound sterling. This contributed to the serious financial and economic crisis that hit Hong Kong in the early 1890s. On the other hand, a largely consistent exchange relationship with the Mainland of China provided stability in the price of some basic commodities. In November 1935, China gave up the silver standard as a result of the outflow of silver, which is caused by the increase in price of silver in the USA. Hong Kong applied the same monetary policy simultaneously. The Hong Kong government declared the Hong Kong dollar as the local monetary unit, with a fixed exchange rate of one Hong Kong dollar to one shilling and three pence (which equals to sixteen Hong Kong dollars to one pound). According to the Currency, Ordinance published in 1935, banks were asked to surrender to an Exchange Fund that all silver...

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