A Review of the Hong Kong Exchange Rate Regime
by Cosmos Fung December, 2012
The currency board system used to peg the HK Dollar with the US Dollar has undoubtedly been successful in keeping the HK dollar exchange rate stable, despite high potential of volatility pre 1983, before this exchange rate regime was implemented. With an external trade over three times the size of the GDP, Hong Kong cannot afford to allow the HKD to float freely, which could impose uncertainty onto the financial sector that Hong Kong is so heavily dependent on. The Hong Kong Monetary Authority (HKMA) has reiterated the importance of the strong HKD peg to USD due to the 'small and externally oriented nature of the Hong Kong economy and the predominance of the USD in international trade and financial transactions'. If the HKD were to float freely, then it is likely to experience frequent, large-scale fluctuations. Hong Kong's economy is only about a fifth the size of Canada or Australia’s, thus HKD may be even more susceptible to erratic movements compared to the Australian Dollar or the Canadian dollar.