Problems of Hong Kong´s Monetary System

Abstract

The Sterling Exchange Standard was introduced in 1935 when Hong Kong, following China, gave up its traditional silver standard and since then linked the Hong Kong Dollar to Sterling. But since the floating of Sterling on 23rd June, 1972, this link has been broken. Instead, the Hong Kong Dollar has been pegged to the U.S. Dollar for the first time in the monetary history of Hong Kong. The link with the U.S. Dollar was an interim measure as the Hong Kong Government made it clear that as soon as the British Government refixes the exchange value of Sterling, the link between Sterling and the Hong Kong Dollar will be restored. In view of the fact that Hong Kong is a British Crown Colony a close link of the Hong Kong Dollar with Sterling is desirable for obvious political and economic reasons. But because of the deteriorating position of Sterling in the international exchange markets in the last five years this link has created considerable difficulties for Hong Kong and other Sterling Area Countries as well. The devaluation of Sterling in 1967 costed Hong Kong a loss of HK$450 million and the floating of the Sterling in 1972 a loss of some HK$890 million which meant a loss of around HK$220 for each Hong Kong resident. These figures indicate clearly the difficulties which arise from the link of the Hong Kong Dollar with Sterling. The difficulties are applicable to all members of the Sterling Area, although they are particularly severe for Hong Kong. The floating of Sterling evoked again our concern about the future of the Hong Kong currency system and the time is ripe to review the present system.