Hong Kong Monetary System

HK’s Linked Exchange Rate SysteHK’s Linked Exchange Rate Systemm

BY BY KWAN Kui KwanKWAN Kui Kwan

KWAN Kui KwanKWAN Kui Kwan

History 1863 - 1935 Silver Dollar

(silver standard base – Int’ l Currency) 1935 – 1967 HK$16.00 to UK£1.00

(1935 Silver Crisis) 1967 – 1972 HK$14.55 to UK£1.00 1972 – 1973 HK$5.65 to US$1.00

(1972 UK Gvn’t float UK£) 1973 - 1974 5.085 to US$1.00 1974 – 1983 free floating

Crisis

high volatility after free floating Inflation from 2.7% (1975) to 15.5% (1980) HK$5.13 to US$1.00 (1981) to HK$9.60

(1983) September 1983 drop of 13% in 2 days the future of Hong Kong (Return to PRC)

15 October 1983 HK$7.80 to US$1.00

Crisis

How it works?

Certificates of Indebtedness back the banknotes issued by the banks

Government-issued notes and coins banknotes issued by HKMA

Aggregate Balance balances of the accounts of banks in HKMA

Exchange Fund Bills and Notes issued by the HKMA

Certificates of Indebtedness

banks issue banknotes required by law to purchase CoI HK$7.80 to US$1.00 backing for the banknotes HKD banknotes fully backed by USD USD held by the Exchange Fund

Notes issued by Banks

The Hongkong & Shanghai Bank Corporation

Notes issued by Banks

Bank of China

Notes issued by Banks

Standard & Chartered Bank

Government-issued HKD

Government appointed agent bank agent bank responsible to store &

distribute settled against US dollars HK$7.80 to US$1.00

Notes issued by Government

Money Printer in HK

Hong Kong Note Printing Limited Located in Tai Po Industrial Estate Share Distribution

HKMA - 55% China Banknote Printing & Minting Corp. –

15% HK & Shanghai Banking Corporation – 10% Standard Chartered Bank (HK) Ltd. – 10% Bank of China (Hong Kong) Limited – 10%

Money Printer in HK

Money Printer in HK

Aggregate Balance

Aggregate Balance may varies HKMA responds to the flow of HKD

Exchange Fund

actively managed to achieve a higher return

long term investment existing foreign currency reserves

9th while the 1st is China, 2nd Japan, 3rd Russia

total assets of HK$1,997.80 billion The Monetary Base HK$1,032.00 billion

Exchange Fund

actively managed to achieve a higher return

long term investment existing foreign currency reserves

9th while the 1st is China, 2nd Japan, 3rd Russia

total assets of HK$1,997.80 billion The Monetary Base HK$1,032.00 billion

Mechanism

CAPITAL INFLOW

1.Market Participants buy HKD

2.Upward pressure on the HKD exchange rate

3.HKMA Currency Board sells HKD

4.Monetary Base of HK expands

5.Interest rates fall

6.HKD exchange rate stability achieved

Mechanism

CAPITAL OUTFLOW

1.Market Participants sell HKD

2.Downward pressure on the HKD exchange rate

3.HKMA Currency Board purchases HKD

4.Monetary Base of HK contracts

5.Interest rates rise

6.HKD exchange rate stability achieved

HK Monetary Authority