The linked exchange rate is highly consistent with the issuance mechanism of the Hong Kong dollar. There is no central bank in Hong Kong, and it is one of the few places in the world where commercial banks issue bank notes. Hong Kong dollars are issued by the Exchange Fund. The Exchange Fund is the only place for Hong Kong's foreign exchange reserves, so it is a reserve issued by Hong Kong dollars. When issuing banknotes, note-issuing banks must pay a deposit of 100% of foreign exchange assets to the Exchange Fund in exchange for an interest-free "debt certificate" as the basis for issuing banknotes. The assets convertible into bonds are silver, silver dollar, pound, US dollar and Hong Kong dollar. After the implementation of the linked exchange rate system, it is stipulated that it must be exchanged in US dollars. In the history of Hong Kong, no matter what kind of assets are converted into bonds, they must be in full. This is a major feature of the Hong Kong dollar issuance mechanism, and the linked exchange rate system is still used today.
According to the linked exchange rate system, when issuing additional Hong Kong dollars, HSBC, Standard Chartered Bank and Bank of China must exchange 100% for debt certificates issued by the Exchange Fund at the exchange rate of HK$ 7.8 equal to US$ 65,438 +0. When the Hong Kong dollar is returned, the note-issuing bank can return the Hong Kong dollar debt certificate to the Exchange Fund for the equivalent US dollar. This mechanism has also been introduced into the interbank cash market, that is, when other licensed banks obtain Hong Kong dollar cash from note-issuing banks, they have to exchange it with 100% US dollars, while when other licensed banks deposit Hong Kong dollar cash with note-issuing banks, the note-issuing banks have to pay the equivalent US dollars to them. These two ways of linking have played an important role in stabilizing the value and exchange rate of the Hong Kong dollar, which is another feature of the linked exchange rate system.
However, in Hong Kong's open foreign exchange market, the exchange rate of the Hong Kong dollar is freely floating, that is, the exchange rate of the Hong Kong dollar is determined by market supply and demand, and the market exchange rate is implemented in both interbank deposit transactions (wholesale market) and cash or deposit transactions between banks and the public (retail market). The coexistence of linked exchange rate and market exchange rate, fixed exchange rate and floating exchange rate is the most important mechanism of Hong Kong's linked exchange rate system.
On the one hand, the government maintains a stable link between the entire Hong Kong dollar system and the US dollar exchange rate by controlling the exchange rate of note-issuing banks; On the other hand, through the market behavior and arbitrage activities of banks and the public, the market exchange rate reflects the actual supply and demand of funds to a certain extent. The linked exchange rate makes the market exchange rate fluctuate within a narrow range at the level of 1: 7.8, and automatically approaches without direct human intervention; Market exchange rate makes full use of market arbitrage activities, reflects the situation of interbank market through the fluctuation of short-term interest rate, and provides a real basis for the contraction and amplification of Hong Kong dollar supply.
The linked exchange rate really became the foundation of Hong Kong's financial management system after some financial crises and the 1987 stock market crash. In order to improve the exchange rate mechanism, Hong Kong monetary authorities have taken a series of measures to create an effective management environment, such as reaching a new accounting arrangement with HSBC, developing a Hong Kong discount window, establishing a liquidity adjustment mechanism, opening up the government bond market, and introducing real-time settlement measures. In addition, through the innovation of monetary policy tools, the short-term interest rate will be controlled within the fluctuation range of American interest rates to ensure the stability of the exchange rate of the Hong Kong dollar against the US dollar. As for the linked exchange rate system, the most powerful adjustment mechanism is the historical monopoly "interest rate agreement", which also includes the rare "negative interest rate" rule in the world. It tightens or relaxes the money supply by adjusting the deposit and loan interest rates of banks, so it is still a policy means to maintain the linked exchange rate system.
history
In fact, the system of pegging the Hong Kong dollar to other currencies has a long history. The Hong Kong dollar is pegged to the British pound from1935,65438+February to 1972. The period from 1 935,65438+February to 1967,1is acceptable. From July of 1972 to June of 1974, 165438+ 10, peg the dollar and float freely.
In the early 1980s, Hong Kong faced future problems. The stock market crash in Hong Kong shook people's confidence in the Hong Kong dollar, and the Hong Kong dollar continued to depreciate. 1 In September 1983, there was a Hong Kong dollar crisis, and the Hong Kong dollar pair1US dollar fell to an all-time low of 9.6 Hong Kong dollars. In order to save Hong Kong's financial system, the Hong Kong government announced the linked exchange rate system on June 5438+0983 10 and June 5438+05, and then the Hong Kong dollar was pegged to the US dollar. The exchange rate is set at HK$ 7.8 1 USD. Since then, it has stabilized and the linked exchange rate system has been implemented to this day.
The linked exchange rate system depends on Hong Kong's huge foreign exchange reserves.
1998 during the Asian financial turmoil, the Hong Kong dollar was heavily traded by international investors headed by Soros, which caused the exchange rate to fluctuate greatly. Later, the Hong Kong Monetary Authority decided to invest funds to stabilize the exchange rate, so that the exchange rate of HK$ 7.8 1 USD could be maintained.
merits and demerits
Hong Kong is a city rather than a country, with a high degree of economic freedom and an open economy. The linked exchange rate helps to stabilize Hong Kong's economy, reduce the impact of foreign economy and exchange rate fluctuations on Hong Kong, and also reduce the exchange rate risk of trade with Hong Kong and foreign investors' investment in Hong Kong. Since most of Hong Kong's raw materials, food and consumer goods depend on imports, the linked exchange rate can also stabilize Hong Kong's prices. However, the linked exchange rate forced Hong Kong to follow the United States in adjusting interest rates, failing to play the role of adjusting the economy and inflation/contraction with interest rates.