Milestones of Monetary Reform

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  • 1863 - 1935
    Silver Standard


    The Hong Kong Government declared silver dollars to be the legal tender and established its first monetary system, the Silver Standard, under which the value of currency was defined in terms of silver and the currency might be exchanged for silver.

  • Dec 1935 - Jun 1972
    Sterling Standard

    Dec 1935:

    Due to a world silver crisis, the Hong Kong Government announced that the Hong Kong dollar would be taken off the Silver Standard and linked to the pound sterling at the rate of HK$16 to the pound.

    Nov 1967:

    The Hong Kong dollar was revalued against the sterling at a new rate of HK$14.55 to the pound following the rapid depreciation of the sterling.

  • Jul 1972 - Nov 1974
    Fixed Exchange Rate against the US dollar

    Jul 1972:

    The Hong Kong dollar was pegged to the US dollar at US$1 to HK$5.65, with ±2.25% intervention band around the central rate.

    Feb 1973:

    The official rate of the Hong Kong dollar was changed to US$1 to HK$5.085.

  • Nov 1974 - Oct 1983
    Free Floating

    Nov 1974:

    A breakdown of confidence in the US dollar led to the collapse of the Bretton Woods system. The Hong Kong dollar became a floating currency.

  • Oct 1983 - now
    Linked Exchange Rate System

    17 Oct 1983:

    Hong Kong started implementing a Currency Board System, under which the Hong Kong dollar is pegged to the US dollar at a fixed exchange rate of US$1 to HK$7.8.

To strengthen the robustness and resilience of the Linked Exchange Rate System, a series of reforms have been implemented since 1987. The main thrust of these measures has been to strengthen the Currency Board arrangements and to enable the efficient operation of the interest rate adjustment mechanism in maintaining exchange rate stability. The monetary reform measures, in chronological order, are as follows:

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  • 1987 - 1988
    Removal of interest rate floor and ceiling

    The negative interest rate mechanism and the exemption of authorized institutions from the legal ceiling on lending rate of 60% in the Money Lenders Ordinance enabled interest rates to move in both directions without restriction, thereby supporting the exchange rate of the Hong Kong dollar.

  • Jul 1988
    Accounting Arrangements

    Under the Accounting Arrangements, the Hongkong & Shanghai Banking Corporation Ltd. (as the Management Bank of the Clearing House of the Hong Kong Association of Banks) was required to maintain an account with the Exchange Fund, and to manage the net clearing balance of the other banks at a level not exceeding the balance in its account with the Exchange Fund, which was determined by the HKMA.

    Note: The Hongkong and Shanghai Banking Corporation Ltd. ceased to be the Management Bank and the Accounting Arrangements were terminated after implementation of Real Time Gross Settlement System on 9 December 1996 when all banks in Hong Kong established accounts directly with the HKMA.

  • Mar 1990
    Exchange Fund Bills Programme (expanded to Exchange Fund Notes in 1993)

    The programme facilitates the development of the local debt market. It increases the supply of high quality Hong Kong dollar paper and establishes a reliable benchmark yield curve for Hong Kong dollar debt.

  • Jun 1992
    Liquidity Adjustment Facility (LAF)

    The LAF was Hong Kong's version of a discount window. Banks could obtain liquidity assistance from the HKMA at the prescribed offer rate through a Sale and Repurchase Agreement involving eligible securities. They could also place excess liquidity with the HKMA through the LAF at the bid rate.

    Note: The LAF was replaced by the Discount Window in September 1998.

  • Dec 1996
    Real Time Gross Settlement system

    With interbank transactions settled across the book of the HKMA, the Aggregate Balance is properly defined and subject to the rule of Currency Board system.

  • Jun 1998
    Publication of the forecast change in Aggregate Balance due to HKMA's foreign exchange transactions

    The announcement of forecast change in Aggregate Balance enhances the transparency of the Linked Exchange Rate System and facilitates a more efficient and orderly interest rate adjustments in money market.

  • Sep 1998
    Technical measures to strengthen Currency Board system

    Two major planks of the technical measures are the provision of a Convertibility Undertaking in respect of the Aggregate Balance and modifications to the Discount Window facility. These measures demonstrate our strong commitment to the Linked Exchange Rate System and help to dampen excessive and potentially destabilising interest rate volatility.

  • Apr 1999
    Fine-tuning measures to further strengthen the Currency Board system

    The Hong Kong dollar exchange rate under the Convertibility Undertaking in respect of the Aggregate Balance moves from 7.7500 to 7.8000 by 1 pip per calendar day to converge with the convertibility rate for the issuance and redemption of Certificates of Indebtedness and coins.

    An explicit backing mechanism is provided for the issuance of coins in circulation, similar to that for banknotes.

    Interest payments on Exchange Fund papers are allowed to expand the Monetary Base.

  • May 2005
    Three refinements to the operation of the Linked Exchange Rate System

    The HKMA introduced a strong-side Convertibility Undertaking to buy US dollars from licensed banks at 7.75, and announced the shifting of the existing weak-side Convertibility Undertaking from 7.80 to 7.85, so as to achieve symmetry around the Linked Exchange Rate of HK$7.8.

Resilience Against External Shocks

Last revision date : 13 November 2023