Follow Hong Kong Investment Immigration and Hong Kong Economy: Former Governor of the Bank of Israel, Stanley Fischer, once said, "No matter what exchange rate system a country adopts, it sometimes wants to switch to another system." Many countries find it very difficult to adopt a floating exchange rate system. However, adopting a fixed exchange rate is even more challenging. Therefore, it is very significant that Hong Kong is celebrating the 30th anniversary of the Hong Kong dollar's peg to the US dollar this week.
The linked exchange rate system in Hong Kong began on October 17, 1983. Since then, the Hong Kong dollar has experienced three economic recessions in the United States, the SARS epidemic, and attacks from George Soros.
In recent years, the pressure on Hong Kong to maintain its linked exchange rate system has been increasing rather than decreasing. To uphold the fixed exchange rate with the US dollar, Hong Kong has followed the Federal Reserve's loose monetary policy even in healthier economic conditions, leading to rising inflation and soaring property prices. The divergence between the Hong Kong economy and the US economy is growing, while its similarity to the economies of other regions in China is increasing. The connection between the Hong Kong dollar and the Renminbi is becoming increasingly distant. The Hong Kong dollar was once closely tied to the Renminbi, which was also pegged to the US dollar at that time. After China adjusted its pegged currency, the Renminbi has appreciated by more than one-third cumulatively.
As Fischer noted, some economists now hope that Hong Kong will adopt another exchange rate system. For instance, Hong Kong could allow the Hong Kong dollar to "crawl" upwards like Singapore to curb inflation, or the Hong Kong dollar could track the increasingly appreciating Renminbi; it is even possible that Hong Kong could eventually use the Renminbi directly. In Hong Kong, Renminbi deposits have already exceeded 10%.
However, these suggestions also have their own flaws. Liu Ligang from Australia and New Zealand Banking Group pointed out that while China may now dominate Hong Kong's trade, the currency of denomination remains the US dollar. Furthermore, the People's Bank of China sets the daily reference exchange rate, and Renminbi assets are still subject to capital controls. Liu Ligang stated that if the Hong Kong dollar is pegged to a non-freely convertible Renminbi, it would deal a devastating blow to Hong Kong's role as an international financial center.
Over time, Hong Kong has also changed some of the constraints of its exchange rate peg. Although the Hong Kong dollar's exchange rate is fixed, other prices and wage levels exhibit significant flexibility. During the financial crisis, even the salaries of senior civil servants were cut. This flexibility has allowed the Hong Kong economy to quickly adjust from cyclical fluctuations without an independent monetary policy.
Prices, especially property prices, can sometimes rise independently. However, merely adjusting the exchange rate flexibility is not sufficient to control asset price bubbles. Despite the strong performance of Singapore's currency, property prices in that country have still risen significantly. In some cases, the currency itself can act as an appreciating asset. For example, the Swiss franc appreciated significantly during the Euro crisis, prompting the Swiss National Bank to intervene in the market. Recently, emerging market countries like India and Indonesia have experienced capital outflows and currency depreciation. In this context, it is indeed remarkable that Hong Kong's linked exchange rate system has been in place for 30 years.