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Enoch Yiu

As international investors diversify away from US dollar assets and amid the rise of internationalisation of the yuan, there are calls for reviewing the Hong Kong dollar’s peg. Here is what to know about the system.
Why is the Hong Kong dollar pegged to the US dollar?
The birth of the peg is closely tied to market uncertainties. The currency was once freely traded and in September 1983 slumped by 48 per cent to a record low of HK$9.60 per dollar when a crisis of confidence occurred as the Chinese and British governments began negotiations for the 1997 handover.
Hong Kong pegged its currency at HK$7.80 per dollar on October 17, 1983, under the Linked Exchange Rate System, in order to stop the swing.
A trading band was then introduced in May 2005 to allow the local currency to swing between HK$7.75 and HK$7.85.

How does the peg operate?
The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, will intervene in the market to ensure the currency trades within the range.
When the Hong Kong dollar trades at the weak end of HK$7.85 per dollar, the HKMA reserves of it, held by banks, reduce liquidity and push interbank market interest rates up to attract money back into Hong Kong dollars.
As the city sees capital outflow and the Hong Kong dollar strengthens, the HKMA does the opposite – selling Hong Kong dollars to banks, increasing bank liquidity and lowering market interest rates to discourage inflows and push the dollar exchange down.
The currency is backed by a war chest of around HK$4.463 trillion (US$569 billion), one of the world’s largest foreign exchange reserves and held in the city’s Exchange Fund, which can be used to defend the currency.
What are benefits and setbacks of the peg?
“The trading range restricts the Hong Kong dollar from moving by up to 1.2 per cent from its weakest and strongest levels against the US dollar,” said Wilson Chan Fung-cheung, an adjunct professor at City University of Hong Kong, who is a veteran banker with three decades of experience before turning academic.
“A stable exchange rate is vital for the Hong Kong business sector and capital market.”
However, the peg means the HKMA raises or cuts the city’s benchmark base rate in lockstep with rate changes by the US Federal Reserve, thereby giving up its independence to adjust monetary policy in response to changing economic conditions. The HKMA may need to raise the base rate even when the city has a weak economy, while it may cut the interest rate when the city has high inflation.
Could the Hong Kong dollar be pegged to the yuan?
“The trade war and tariff encourage more companies and traders to reduce the reliance on the US dollar for trade settlement and investment,” said Chan Ka-keung, the chairman of the Chamber of Hong Kong Listed Companies, who is also Hong Kong’s former secretary for financial services and the treasury from 2007 to 2017.
“This will support more international usage of yuan as the country has introduced a lot of measures in recent years to support the internationalisation of the yuan,” he said.
Though China is promoting the internationalisation of the yuan, Chan, however, believes the yuan could not replace the US dollar soon, while the Hong Kong dollar would still need to be pegged to the US dollar to retain its status as an international financial centre.
“The yuan is not yet a freely convertible currency, so there is no way for international investors to widely use it for investment, and that is why the Hong Kong dollar could not be pegged with the yuan,” Chan said.
The yuan’s share in global payments was just 3.1 per cent in June, ranking fifth after the US dollar, euro, sterling and Japanese yen. The US dollar is still the most used currency in international payment, with a share of 50.1 per cent, more than double that of the euro at second place, at 21.9 per cent, data from interbank messaging service Swift showed.
What is the government’s stance?
HKMA chief executive Eddie Yue Wai-man told lawmakers in May that the city had no intention of changing the peg.
“Global investment markets are mainly traded in the US dollar. Pegging the Hong Kong dollar to the US dollar makes the local capital market more attractive to international investors,” Yue said at a financial affairs panel.
“If we keep the peg but change the linkage with other currencies, it would also hard hit the market confidence. Once we make any change to the peg, there would speculation that there may be more changes in future,” Yue said. “I reiterate that we have no intention to make any changes to the peg.”
Hong Kong Chief Executive John Lee Ka-chiu also said the city would keep the peg with the US dollar.
“Hong Kong’s link with the US dollar has proven to be one of the fundamental success factors,” Lee told the SCMP in an interview in June last year, noting the peg had always come under pressure, especially in uncertain times.


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As global investors shift away from US dollar assets, Hong Kong is tied to the US dollar to maintain a stable exchange rate


As global investors shift away from US dollar assets, Hong Kong is tied to the US dollar to maintain a stable exchange rate.


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Hong Kong’s US dollar peg explained: history, benefits and risks

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}As global investors shift away from US dollar assets, Hong Kong is tied to the US dollar to maintain a stable exchange rate

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;}Why is the Hong Kong dollar pegged to the US dollar?

As global investors shift away from US dollar assets, Hong Kong is tied to the US dollar to maintain a stable exchange rate

Why is the Hong Kong dollar pegged to the US dollar?