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Hong Kong’s Linked Exchange Rate System
A brief history of Hong Kong dollar exchange rate arrangements
A brief history of Hong Kong dollar
exchange rate arrangements
Hong Kong has had a linked exchange rate regime of one kind or another
for most of its history as a trading and financial centre.
In 1863 the Hong Kong Government declared the silver dollar – then a kind
of international currency – to be the legal tender for Hong Kong, and in
1866 began issuing a Hong Kong version of the silver dollar. The silver
standard became the basis of Hong Kong’s monetary system until 1935,
when, during a world silver crisis, the Government announced that the Hong
Kong dollar would be taken off the silver standard and linked to the pound
sterling at the rate of HK$16 to the pound.2
Under the Currency Ordinance of 1935, banks were required to surrender to
the Exchange Fund (which was invested in sterling assets) all silver bullion
held by them against their banknote issues in exchange for Certificates of
Indebtedness. These Certificates were the legal backing for the notes issued
by the note-issuing banks under what became, in effect, a Currency Board
system. The note-issuing banks were obliged to purchase the Certificates to
back subsequent increases in their note issue with sterling.
In June 1972 the British Government decided to float the pound sterling. The
Hong Kong dollar was then linked briefly to the US dollar, first at the rate of
HK$5.65 to the US dollar, and then, from February 1973, at HK$5.085. But,
from June 1972, the note-issuing banks were allowed to purchase
Certificates of Indebtedness with Hong Kong dollars.
In November 1974, against a weakening US dollar, the Hong Kong dollar
was allowed to float freely.
2 For more details about the early monetary history of Hong Kong, see the HKMA
publication Money in Hong Kong: A Brief Introduction, November 2000. A soft copy
of the publication is available on the HKMA website (www.hkma.gov.hk).
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A brief history of Hong Kong dollar exchange rate arrangements
EXCHANGE