The Hong Kong dollar link

inSight

25 Oct 2001

The Hong Kong dollar link

Hong Kong's linked exchange rate system provides stability in unstable times.

Last week, as we entered the nineteenth year of the link between the Hong Kong dollar and the US dollar, rather sharp focus was once again drawn to the question of its appropriateness for Hong Kong. Perhaps this is not widely appreciated, and indeed on this matter we have been criticised as being insensitive and stubborn, but we in the Hong Kong Monetary Authority actually welcome open and informed debate on the subject matter. We, of course, have our own, rather well known and unambiguous position on the subject, and it is one that is fully in accordance with the monetary policy objective of Government, as determined by the Financial Secretary. But this does not mean that we do not listen to alternative points of view, or that such views are lightly dismissed. It is absolutely right that a policy that forms the keystone of our financial system should be subject to open scrutiny. This is essential for ensuring that the policy that is pursued is in the best interests of the community.

An informed debate involves examining and re-examining the benefits as well as the costs of our monetary system. And this means having the courage openly to speak of, and accept, its limitations, while not overlooking its merits, no matter how much they have been taken for granted. But frank comments always carry the risk of misunderstanding and of generating rumours that a change of policy may be on the cards. And as the investment houses in the business of advising, and conducting transactions for, their clients quickly seize the opportunity to comment, as they are expected to do, the matter can easily be blown out of proportions. Experience of operating the linked exchange rate system in the past eighteen years tells me that this is inevitable but that, after the brief excitement, things will return to normal and we will all be wiser until the time we need to be reminded again of the reality we face.

Eighteen years is, of course, a long time. It is twice as long as the life of the floating exchange rate system we had from 1974 to 1983. But for those of us who are old enough, it is not difficult to recall the circumstances that led to the creation of the link in October 1983. The sharp and uncontrollable depreciation of the Hong Kong dollar, at the height of it by 15% in two days, and concurrently the many queues at the supermarkets as confidence in the currency collapsed, must still be vivid images. They are to me. Of course history does not repeat itself. Times change. Yes, we have much more robust monetary arrangements and a much stronger banking system now than in 1983. But international finance, under the influence of globalisation, is now also much more potent than it was in 1983 - witness the Asian financial turmoil of 1997-98 and the performance of those economies that have since allowed their exchange rates to be floated. And there are other destabilising influences outside of our control that we now have to contend with, as a result of the global economic slowdown that has been exacerbated by the terrorist attacks in the United States.

We are facing a great deal of uncertainty and stress. We should treasure what stability we have, in our banking system and financial infrastructure, and in our currency. This is a rare position of strength in this turbulent world, and as I mentioned in the luncheon speech I delivered earlier in the week to the Hong Kong Institute of Bankers, we should direct our efforts towards building stability, not destroying or undermining it. It is from this position of strength, and not through any sudden and destabilising gimmickry, that we will best be able to weather the difficulties that now face us, and to embrace the opportunities to come.

 

Joseph Yam

25 October 2001

 

More information on the Linked Exchange Rate System can be found here.

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Last revision date : 25 October 2001