25 years of linked rate in Hong Kong – review and outlook

In 1983, due to the negotiation of Hong Kong’s future between China and UK, many people lost the confidence to Hong Kong’s economy and the exchange rate of Hong Kong dollar reduced rapidly. In October 1983, the Hong Kong Government took measure to stabilize the exchange rate, including imposing linked rate to US dollar. This helped the steady growth of Hong Kong’s economy for more than a decade. In the Asian financial crisis in 1997, the mechanism reduced the bad impact to the trade and the reduction of purchasing power of the public.

But the external factors have been changed a lot in the past 25 years. For example, global economic decline derived from over-expansion of loans, especially in sub-prime, probable further decrease of the exchange rate of US dollar due to huge amount of debts of the government of USA, and these make Hong Kong dollar being vulnerable to depreciation of US dollar. Therefore, some financial experts and politicians suggested that Hong Kong dollar exchange rate should include factors of basket of currencies, or peg with yuan. However, the global foreign exchange rates are still based on US dollar and basket of currencies are still unreliable to purchasing power of Hong Kong dollar.

One solution is to make the band of exchange rate of Hong Kong dollar to US dollar wider. When the rate of Hong Kong dollar is high for a few of months, the authorities should increase the base rate. The benefits of this mechanism are reflecting the actual value of Hong Kong dollar, allowing steady increase in exchange rate and reduce the negative impact of changing of rate.

The government of Hong Kong should change the composition of monetary fund. At least one quarter of the fund should be used for purchasing precious metals because most of the existing circulating currencies in the world are based on bonds and thus they are unstable. The history has proved that gold and silver are the most reliable currencies. In fact, half of the total circulating Swiss francs are backed by gold reserves and the exchange rate of Swiss franc has been increased in the past 40 years. Moreover, the inflation of Swiss franc is quite low for a long time. Thus it should be the best method to stabilize the financial system of Hong Kong!

 

The original text was distributed on 10:15pm, 17 October, 2008.