The Linked Exchange Rate System in Hong Kong
ECON 305
Final Paper
Ho Ming, Lo
The Linked Exchange Rate System in Hong Kong
On Nov 16, 2011, The IMF Staff Mission visited Hong Kong and showed endorsement on keeping the linked exchange rate in place (HKISD, 2011), in spite of the voices of the abolition of the system, which causes adverse effects to the Hong Kong economy with monetary policies by the FED (Stephen, 2010). This system has been in function from the year 1983. It grants the HKD stability predictability and attracts foreign investments, turning Hong Kong into the world financial centre.
In 1863, the Hong Kong Government declared silver coins —the most common international currency then—as the fiat money in Hong Kong. This system of silver standard lasted until 1935, the time when the rate between silver and gold fluctuated dramatically because of the global silver crisis. The government abandoned the system of silver standard and created the Hong Kong Dollars and linked it with the Great Britain Pound at a rate of HKD 16 = GRP 1. In the same year, the government published the Currency Ordinance (now named Exchange Fund Ordinance) (HKMA, 2011), which established the Hong Kong Monetary Authority (HKMA), and required the note-issuing banks the purchase of the Certificate of Indebtedness from the HKMA to issue HKD. The regulations had settled the direction of the currency board system for Hong Kong until now. In 1972, due to the decline of United Kingdom’s economy, the HKD was, the first time, linked to the USD at a rate of HKD 5.65 = USD 1, and later HKD 5.085 = USD 1. The link was removed between year 1974 and 1983. During this period, Hong Kong encountered crises such as high inflation rates, the weakening of HKD and the stock market crash in 1981. People had no confidence on HKD, which was down to the historical lowest rate with the USD in 1983: HKD 9.6 = USD 1. To revive Hong Kong’s economy, the government reestablished the linkage with USD on October 17, at the rate of HKD 7.8 = USD 1. The
Final Paper
Ho Ming, Lo
The Linked Exchange Rate System in Hong Kong
On Nov 16, 2011, The IMF Staff Mission visited Hong Kong and showed endorsement on keeping the linked exchange rate in place (HKISD, 2011), in spite of the voices of the abolition of the system, which causes adverse effects to the Hong Kong economy with monetary policies by the FED (Stephen, 2010). This system has been in function from the year 1983. It grants the HKD stability predictability and attracts foreign investments, turning Hong Kong into the world financial centre.
In 1863, the Hong Kong Government declared silver coins —the most common international currency then—as the fiat money in Hong Kong. This system of silver standard lasted until 1935, the time when the rate between silver and gold fluctuated dramatically because of the global silver crisis. The government abandoned the system of silver standard and created the Hong Kong Dollars and linked it with the Great Britain Pound at a rate of HKD 16 = GRP 1. In the same year, the government published the Currency Ordinance (now named Exchange Fund Ordinance) (HKMA, 2011), which established the Hong Kong Monetary Authority (HKMA), and required the note-issuing banks the purchase of the Certificate of Indebtedness from the HKMA to issue HKD. The regulations had settled the direction of the currency board system for Hong Kong until now. In 1972, due to the decline of United Kingdom’s economy, the HKD was, the first time, linked to the USD at a rate of HKD 5.65 = USD 1, and later HKD 5.085 = USD 1. The link was removed between year 1974 and 1983. During this period, Hong Kong encountered crises such as high inflation rates, the weakening of HKD and the stock market crash in 1981. People had no confidence on HKD, which was down to the historical lowest rate with the USD in 1983: HKD 9.6 = USD 1. To revive Hong Kong’s economy, the government reestablished the linkage with USD on October 17, at the rate of HKD 7.8 = USD 1. The