The linked exchange rate system, adopted 30 years ago today, is the “cornerstone” of the city’s monetary and financial stability, Tsang said in the notes, which were provided to Bloomberg. The currency regime has been crucial to helping Hong Kong’s gross domestic product grow almost 10 times since its inception, Tsang said.
The city pegged its currency at about HK$7.80 to the U.S. dollar on Oct. 17, 1983, to provide stability as China and the U.K. negotiated Hong Kong’s return to Chinese rule. The Hong Kong Monetary Authority used $15 billion of its reserves fending off a speculative attack on the link during the 1997-8 Asian financial crisis.
“With the Hong Kong dollar pegged to the U.S. dollar, it is much easier for businesses to estimate their costs and determine their pricing, since they need not worry about potential losses due to fluctuations in the exchange rate,” Tsang said. “They can also save costs for hedging against exchange rate volatility.”
The currency link means Hong Kong’s interest-rate policy is dictated by that of the Federal Reserve (FDTR) and calls for a review have mounted since 2008 as near-zero U.S. interest rates fueled a surge in the city’s property prices and living costs.
Eight out of 13 analysts surveyed by Bloomberg said the Hong Kong dollar should be pegged to a basket of currencies or the yuan if there is a change. The currency’s trading band could also be widened, four said.
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