Hong Kong’s Experience in Operating the Currency Board System
Hong Kong’s Experience in Operating the Currency Board System
Priscilla Chiu
Hong Kong Monetary Authority
I.
INTRODUCTION
When Hong Kong revived the currency board arrangements in October
1983, it faced a financial world that was vastly different from that earlier in the century when currency boards flourished in British colonies and protectorates.1 Bank deposits had taken over currency notes as the predominant medium of exchange.
Capital
mobility had been significantly enhanced: large sums of money could be transferred across national borders within a fraction of a second. Moreover, following the demise of the Bretton Woods system, most major industrialised economies had floated their currencies, and sharp volatility was seen in the international foreign exchange market from time to time. Furthermore, indigenous banks had grown along with foreign banks, requiring more attention to issues such as the provision of support as a lender of last resort. Hong Kong presents an interesting case study not only because it has a relatively long history in operating a modern-day currency board. The structure of the economy, characterised by a high degree of openness, complete absence of exchange controls, and sizeable financial flows, makes it particularly prone to challenges of the present-day financial system. Our experience in tackling these problems may be of relevance to other currency board economies.
The rest of the paper is organised as follows: the next section describes the circumstances under which the linked exchange rate system was adopted in 1983.
This is followed in section III by a discussion of the reforms undertaken to strengthen the system from 1988 up to the period before the Asian financial turmoil in 1997.
Section IV recounts salient aspects of our experience during the turmoil, while section
V discusses further technical reforms to enhance the resilience of the monetary arrangements. Section VI turns to the
Priscilla Chiu
Hong Kong Monetary Authority
I.
INTRODUCTION
When Hong Kong revived the currency board arrangements in October
1983, it faced a financial world that was vastly different from that earlier in the century when currency boards flourished in British colonies and protectorates.1 Bank deposits had taken over currency notes as the predominant medium of exchange.
Capital
mobility had been significantly enhanced: large sums of money could be transferred across national borders within a fraction of a second. Moreover, following the demise of the Bretton Woods system, most major industrialised economies had floated their currencies, and sharp volatility was seen in the international foreign exchange market from time to time. Furthermore, indigenous banks had grown along with foreign banks, requiring more attention to issues such as the provision of support as a lender of last resort. Hong Kong presents an interesting case study not only because it has a relatively long history in operating a modern-day currency board. The structure of the economy, characterised by a high degree of openness, complete absence of exchange controls, and sizeable financial flows, makes it particularly prone to challenges of the present-day financial system. Our experience in tackling these problems may be of relevance to other currency board economies.
The rest of the paper is organised as follows: the next section describes the circumstances under which the linked exchange rate system was adopted in 1983.
This is followed in section III by a discussion of the reforms undertaken to strengthen the system from 1988 up to the period before the Asian financial turmoil in 1997.
Section IV recounts salient aspects of our experience during the turmoil, while section
V discusses further technical reforms to enhance the resilience of the monetary arrangements. Section VI turns to the