Key Functions

Monetary Stability
Linked Exchange Rate System
Interest Rate Adjustment Mechanism
Liquidity Support to Banks
EFAC Currency Board
Transparency of Currency Board Operations
Notes & Coins of
Hong Kong
Coin Collection Programme
Milestones of Monetary Reform
History of Hong Kong's Exchange Rate System
Banking Stability
Banking Policy & Supervision
The Three-tier Banking System
Regulatory Framework
Advisory Committees
Regulation of the Issue of Multi-purpose Stored Value Cards
Regulation of Money Brokers
Consumer Corner
HKMA’s Work in Relation to Strengthening Financial Consumer Protection
Consumer Education Programme
Frequently Asked Questions
Complaints about Banks
Internet Banking
Security Controls for ATM Services
Guide to Authorization
Supervisory Policy Manual
Oversight of Financial
Market Infrastructures
Basel III
Systemically Important Authorized Institutions (SIBs)
Review of the HKMA's Work on Banking Stability
Sharing of Mortgage Data
Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT)
AML/CFT-related Circulars
Sanctions-related Notices and Updates
Countercyclical Capital Buffer (CCyB)
International Financial Centre
International & Regional Financial Co-operation
International & Regional Financial Co-operation
Participation in Multilateral Agencies & International Forums
Co-operation with Other Central Banks
Application of the "One Country, Two Systems" Principle
Renminbi Business in Hong Kong
Debt-market Development
Exchange Fund Bills & Notes
Government Bond Programme
Important Policy Initiatives Affecting The EFBN Programme & Other Hong Kong Dollar Debt Instruments
Financial Infrastructure in Hong Kong
Payment Systems
OTC Derivatives Trade Repository
System Links
Pan-Asian CSD Alliance
Retail Payment Development
Useful Links
Regulatory Regime for Stored Value Facilities (SVF) and Retail Payment Systems (RPS)
Regulation of Stored Value Facilities (SVF)
Regulation of Retail Payment Systems (RPS)
Exchange Fund

Linked Exchange Rate System

The Linked Exchange Rate System was established in 1983. It is in essence a Currency Board system, which requires both the stock and the flow of the Monetary Base to be fully backed by foreign reserves. Any change in the size of the Monetary Base has to be fully matched by a corresponding change in the foreign reserves. In Hong Kong, the Monetary Base comprises the following components:

Certificate of Indebtedness and Coins Issued

Banknotes in Hong Kong are issued by the three note-issuing banks When issuing banknotes, the note-issuing banks are required to submit US dollars (at HK$7.80 = US$1) to the HKMA for the account of the Exchange Fund in return for Certificates of Indebtedness (which are required by law as backing for the banknotes issued). The Hong Kong dollar banknotes are therefore fully backed by US dollars held by the Exchange Fund. In the case of government-issued notes and coins, which are issued by the Government through the HKMA, transactions between the HKMA and the agent bank responsible for storing and distributing the coins to the public are settled against US dollars at the rate of HK$7.80 to one US dollar.

The Aggregate Balance

Operating under the rule-based Currency Board system, the Aggregate Balance varies in accordance with the flow of fund into and out of the Hong Kong dollar. The HKMA operates Convertibility Undertakings on both the strong side and the weak side of the Linked Rate of HK$7.80 to one US dollar. The HKMA undertakes to buy US dollars from licensed banks at HK$7.75 to one US dollar (strong-side Convertibility Undertaking) and sell US dollars at HK$7.85 to one US dollar (weak-side Convertibility Undertaking). Within the Convertibility Zone between 7.75 and 7.85, the HKMA may choose to conduct market operations consistent with Currency Board principles with the aim of promoting the smooth functioning of the money and foreign exchange markets.

Outstanding Exchange Fund Bills and Notes

The proceeds from the issue of Exchange Fund Bills and Notes have over time been switched into US dollar assets. The HKMA has also undertaken that additional Exchange Fund paper will only be issued when there is an inflow of capital. This ensures that all new Exchange Fund paper will be fully backed by foreign currency reserves. Starting from 1 April 1999, interest payments on Exchange Fund paper are allowed to expand the Monetary Base. Additional Exchange Fund paper is issued to absorb such interest payments. This procedure is consistent with the Currency Board discipline, since interest payments on Exchange Fund paper are backed by interest income on the US dollar assets backing the Monetary Base. It also allows the Exchange Fund Bills and Notes programme to grow in a non-discretionary manner.

For a general discussion on the Linked Exchange Rate System, please see also Background Brief No. 1: Hong Kong's Linked Exchange Rate System.

Last revision date: 26 August 2011
Tender Invitations
Legislative Council Issues
The HKMA Information Centre
Monetary Stability
Banking Stability
International Financial Centre
Exchange Fund
Annual Report
Half-Yearly Monetary & Financial Stability Report
Quarterly Bulletin
HKMA Background Briefs
Reference Materials
CMU Bond Price Bulletin
Economic & Financial Data for Hong Kong
Monthly Statistical Bulletin
Monetary Statistics
Press Releases
Guidelines & Circulars
Forthcoming Events
Consumer Corner
Consumer Education Programme
Complaints about Banks
Internet Banking
Fraudulent Bank Websites, Phishing E-mails and Similar Scams
Be Careful of Bogus Phone Calls Authenticate the Callers
Register of Securities Staff of AIs
Register of AIs & LROs
Investment Products Related to Lehman Brothers