Hong Kong Monetary System HK’s Linked Exchange Rate System BY KWAN Kui Kwan KWAN Kui Kwan

History 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£ – 1973 HK$5.65 to US$1.00  (1972 UK Gvn’t float UK£) to US$ – 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

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, billion  The Monetary Base HK$1, 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, billion  The Monetary Base HK$1, 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