the exchange rate system in hong kong linked exchange rate system
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The exchange rate system in Hong Kong
Linked exchange rate system
Hong Kong is a……Hong Kong is a……
Trading CentreInternational Financial &
Monetary CentreWhat is the reason make Hong
Kong so Successful?
The Linked exchange rate system
History of Exchange Rate History of Exchange Rate System in Hong KongSystem in Hong Kong
Date Exchange rate regime
Reference rate
1863 – 4 Nov 1935
Silver Standard
Silver dollars as
legal tender
Dec 1935 Link to Sterling
£1 = HK$16(Dec 1935 – Nov 1967)
Link to Sterling
£1 = HK$14.55
(Nov 1967 – Jun 1972)
History of Exchange Rate History of Exchange Rate System in Hong KongSystem in Hong Kong
Date Exchange rate regime
Reference rate
6 Jul 1972 Link to the US dollar with ±
2.25% intervention
bands around a central rate
US$1 = HK$5.65
(Jul 1972 – Feb 1973)
Link to the US dollar
US$1 = HK$5.085
(14 Feb 1973 – Nov 1974)
History of Exchange Rate History of Exchange Rate System in Hong KongSystem in Hong Kong
Date Exchange rate regime
Reference rate
25 Nov 1974 Free float Exchange rates on
selected datesUS$1 =
HK$4.965 (25 Nov 1974)
US$1 = HK$9.600 (24
Sep 1983)
17 Oct 1983 Link to the US dollar
US$1 = HK$7.80
History of Exchange Rate History of Exchange Rate System in Hong KongSystem in Hong Kong
What is Linked Exchange What is Linked Exchange rate System? rate System?
Currency broad system Pegged the Hong Kong Dollar to the USD at the rate of 7.80Two exchange currency markets in HK (Exchange Fund and open market )
Ways to fixed the exchange Ways to fixed the exchange rate at HK$7.8 = US$1rate at HK$7.8 = US$1
Arbitrage activities • Different in the price of a good in
different market• Buy the product at the lower price
market • Sell it at the higher price market
Two kinds of arbitrage activities in exchange rate system
a) Interest rate arbitrage b) Currency arbitrage
Interest rate arbitrage Interest rate arbitrage
Determined by demand and supply Speculation against HK DollarDemand for HK Dollar would then decrease HK Dollar would depreciation against USD
in open market Domestic interest rate would rise and this
would attract back the funds Demand for the HK Dollar would rise Exchange rate would be stabilized
Interest rate arbitrageInterest rate arbitrage
Speculation for HK dollarDemand for HK dollar would rise Exchange rate of HK dollar to US
dollar would increase in open market Domestic interest rate would then fall Demand for HK dollar would fallExchange rate of HK dollar would be
stabilized
Currency arbitrage Currency arbitrage
Exchange rate of HKD fall in open market
Exchange rate fixed in the close market
Different of HKD to USD in open market
How does bankers gain How does bankers gain profit?profit?
Sell USD for HK Dollar in open market
Sell HK Dollar for USD in Exchange Fund
Exchange rate of HK Dollar for USD would be stabilized
Why the linked exchange Why the linked exchange rate system important to HK rate system important to HK
??1. Suits the needs of a highly open
economy such as Hong Kong’s2. Enables Hong Kong to adjust to
shocks without the damage and volatility of a sudden currency collapse
Why the linked exchange Why the linked exchange rate system important to HK rate system important to HK
??3. Provides Hong Kong with a firm m
onetary4. Reduces the foreign exchange risk
faced by importers, exporters and international investors
The effectiveness of the Linked The effectiveness of the Linked is helped by a number of is helped by a number of
economic attributes enjoyed by economic attributes enjoyed by Hong Kong:Hong Kong:
1. The structure of Hong Kong economy is flexible and responsive
2. Hong Kong’s banking system is strong and solvent, and well able to deal with the fluctuations in interest rates
The effectiveness of the Linked The effectiveness of the Linked is helped by a number of is helped by a number of
economic attributes enjoyed by economic attributes enjoyed by Hong Kong:Hong Kong:
3. The Hong Kong Government pursues a prudent fiscal policy
4. Hong Kong possesses ample foreign currency reserves for supporting the Linked Exchange Rate System
Advantages of the Linked Advantages of the Linked Exchange Rate SystemExchange Rate System
Provides a stable, predictable and well understood monetary system
Suited to Hong Kong’s highly external and flexible economy
To its position as an international financial centre
Advantages of the Linked Advantages of the Linked Exchange Rate SystemExchange Rate System
Enables Hong Kong’s economy to adjust to external shocks without the damage
Volatility of a sudden currency collapse
Provides Hong Kong with a firm monetary anchor
Reduces the foreign exchange risk
Advantages of the Linked Advantages of the Linked Exchange Rate SystemExchange Rate System
The Hong Kong dollar exchange rate has remained stable in the face of various shocks
Unaffected by the 1987 stock market crash
Advantages of the Linked Advantages of the Linked Exchange Rate SystemExchange Rate System
Stable Hong Kong’s economy in the face of external shocks without the damage and volatility of a sudden currency collapse
Advantages of the Linked Advantages of the Linked Exchange Rate SystemExchange Rate System
Advantages of the Linked Advantages of the Linked Exchange Rate SystemExchange Rate System
the price level of Hong Kong has been exceptionally stable:
There had been an increase more than 10% in price level five times (1973, 1974, 1979, 1980 and 1981) a year within the twenty years
Disadvantages of the Linked Disadvantages of the Linked Exchange Rate SystemExchange Rate System
Ties Hong Kong to US monetary policy
The economy of Hong Kong is directly affected by the monetary policy of US and US Dollar
The business cycle of Hong Kong and US might not be indifferent
Disadvantages of the Linked Disadvantages of the Linked Exchange Rate SystemExchange Rate System
In 1998, Hong Kong was facing a depression and a high unemployment rate
Hong Kong Government might increase the money supply of Hong Kong Dollar
Reduce the price of goods in Hong Kong
Disadvantages of the Linked Disadvantages of the Linked Exchange Rate SystemExchange Rate System
To increase the export and decrease imports
Theoretically, flexible exchange rate system should be used
Disadvantages of the Linked Disadvantages of the Linked Exchange Rate SystemExchange Rate System
But, US Dollar was appreciatingRestricted Hong Kong government
to change the money supplyObstructed the speed of recovering
in Hong KongA great matter when Hong Kong
and US are in alien business cycles
Disadvantages of the Linked Disadvantages of the Linked Exchange Rate SystemExchange Rate System
Reduces Hong Kong's ability to deal with external shocks• HKMA surrenders its power to adjust the
territory's monetary policy to the U.S. Federal Reserve
• The currency crisis in Southeast Asia in 1998, could lead to excessive financial market volatility whenever there are speculative attacks on the Hong Kong dollar
Should the exchange rate Should the exchange rate system be changed to float?system be changed to float?For:
•The HKMA can get back the independence of monetary policy ― HKMA can use suitable policy to
stabilize the Hong Kong economy― The Hong Kong monetary policy has
to follow that of US under the linked― Use the same monetary policy may
cause serious problems
Should the exchange rate Should the exchange rate system be changed to float?system be changed to float?Against:
•The economy in Hong Kong may greatly fluctuate
• Price level fluctuated greatly in 1970s – 80s
• Lots of money flows in Hong Kong everyday
Should the exchange rate Should the exchange rate system be changed to float?system be changed to float?
HKMA does not have necessary monetary instruments•The policy of controlling money
supply
Should the exchange rate Should the exchange rate system be changed to float?system be changed to float?
The necessary conditions of changing the system•HKMA has the full necessary
monetary policy•Do not let the market entirely
freely operate•Notice the change suddenly
ConclusionConclusion
The exchange rate system of Hong Kong has been improving
Stabilize the Hong Kong economyBrings a basis of being an
international financial centre There will not be a change in the
system in the following few years
The EndThe End
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