The government of Hong Kong pegged the Hong Kong dollar to the U.S. dollar in October 1983 at a fixed exchange rate of HK$7.8 against US$1, and has continued
|Exchange rates: Hong Kong|
|Hong Kong dollars (HK$) per US$1|
|Note: Hong Kong became a special administrative region of China on July 1, 1997; before then, the Hong Kong dollar was linked to the US dollar atthe rate of about 7.8 Hong Kong dollars per US dollar.|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
this relationship as of 2001. Meant to ensure the stability of the Hong Kong dollar, this policy has been implemented under the Linked Exchange Rate System. This system subjects any change in the size and flow of the money in circulation to a corresponding change in the foreign exchange reserves of Hong Kong. This occurs whether as a result of Hong Kong's domestic resources or as a result of an inflow of foreign capital. Accordingly, the 3 banks in charge of issuing bank notes can do so only if they deposit an equivalent amount of U.S. dollars in an exchange fund kept by the Hong Kong Monetary Authority (HKMA) for any amount of HK dollars that they want to issue. The equivalent amount of these foreign currencies is determined at the fixed exchange rate of HK$7.8/US$1. Apart from this official exchange rate , there is also a free- floating exchange rate . This exchange rate has remained around 7.7 since 1995. While the official exchange rate of the HK dollar against the U.S. dollar is fixed and determined by the HKMA, the exchange rate of the HK dollar against any other major currency follows the U.S. dollar exchange rate against that currency, which makes it a free-floating rate.
The HKMA maintains the stability of the HK dollar-U.S. dollar exchange rate through an automatic interest-rate adjustment mechanism. This requires the control of local liquidity and interest rates. Through this mechanism, Hong Kong has managed to have monetary stability and avoid high inflation rates and sharp fluctuations in the value of the national currency. This has made a major contribution to the stability and growth of its economy, which has not experienced long and sudden periods of economic declines with their destructive impacts on employment and prices. The Hong Kong monetary policy has also helped its economy cope better with the financial crisis of the late 1990s, which devastated many Asian economies. However, this policy has a negative side since it links the HK dollar to the U.S. dollar and leaves little room for independent monetary policy of Hong Kong since it has to follow that of the United States.
Consistent with its status as a strong base for free enterprise, there is no official control on foreign currency exchange transactions in Hong Kong. Regardless of their size, there is no restriction on transfers to and from Hong Kong of funds in any currency, including the HK dollar.
The Stock Exchange of Hong Kong (SEHK) was established in 1986 as a result of the merger of 4 stock exchanges. Having a market capitalization of US$616.3 billion (June 2000), the SEHK is one of the world's major stock markets, and the second largest stock market in Asia after Japan.