Eddie Yue Wai-man

Opinion | After 40 years of stability, Hong Kong’s US dollar peg is here to stay

The cornerstone of monetary and financial stability in Hong Kong, the linked exchange rate system is transparent, resilient and has helped the city weather many shocks and crises

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The linked exchange rate system’s success rests on its robust design, and highly transparent and rule-based mode of operation. Photo: Shutterstock

Eddie Yue Wai-man

Published: 12:01am, 17 Oct 2023Updated: 2:38am, 17 Oct 2023

The biggest headline 40 years ago was that Hong Kong had introduced the linked exchange rate system, pegging Hong Kong’s currency to the US dollar. For the past 30 years or so, my work at the Hong Kong Monetary Authority (and its predecessor the Office of the Exchange Fund) has involved this linked system, directly or indirectly. It is fair to say I have established a long-lasting and strong relationship with this important part of Hong Kong’s financial regime.

The linked exchange rate system is a good one. It is the cornerstone of monetary and financial stability in Hong Kong, providing a stable environment for the development of our economy and community. It has helped Hong Kong weather shocks and crises, which have highlighted the system’s resilience and robustness.

The system’s success rests on its robust design, in line with market disciplines, and its highly transparent and rule-based mode of operation, as well as our abundant foreign reserves, strong fiscal position and dynamic economy.

It is characterised by the currency board arrangement, which restricts the Monetary Authority’s discretion. We introduced the seven technical measures in 1998 and the three refinements in 2005, making the system more rule-based and aligned with our policy intent.

More importantly, the market has seen the system function in strict adherence to its design. Since 2005, the “strong-side convertibility undertaking” has been triggered 321 times, with the HKMA buying US dollars equivalent to nearly HK$1.45 trillion (US$185 billion) to keep the Hong Kong dollar below the higher limit of the trading band.

The “weak-side convertibility undertaking”, which keeps the Hong Kong dollar from weakening too much, has been triggered 84 times, resulting in the selling of US dollars equivalent to nearly HK$420 billion. These inflows and outflows worked like clockwork.