The Linked Exchange Rate system of Hong Kong联系汇率制度，香港.ppt

1 April 1993 Main Functions Keeping the Hong Kong dollar stable Managing the Exchange Fund in a sound and effective way Promoting the safety and stability of Hong Kong’s banking system Developing Hong Kong’s financial infrastructure Monetary Policy Objective Importance of Exchange Rate Stability As an international financial centre, exchange rate volatility affects capital allocation decision of foreign investors US Dollar as the Anchor Currency Business cycle synchronisation between Hong Kong and the US is the highest Historical Background Currency Board system Currency in circulation Aggregate Balance Exchange Fund Bills and Notes Automatic adjustment mechanism (1) Automatic adjustment mechanism (2) Reform measures September-1998 ( seven measures ) May-2005 ( three refinements) Seven technical measures Weak-side Convertibility Undertaking Discount Window FX market development in 2002-05 Aggregate Balance HKD USD interest rates Impact of easy monetary conditions Risk of inflation and formation of asset bubble Destabilising effect associated with realignment of HKD interest rates with USD rates Three refinements Three refinements (1) Three refinements (2) Three refinements (3) Effects of the three refinements Remove uncertainty about appreciation potential of the Hong Kong dollar HKD interest rates closer to USD rates Strengthen the operation of the Linked Exchange Rate system Hong Kong dollar exchange rate 12-month interest rate spreads Conclusion The Linked Exchange Rate system is a cornerstone for maintaining economic stability Economic underpinnings Ample forex reserves Flexible economic structure Prudent fiscal policy stance Sound banking system * The Linked Exchange Rate system of Hong Kong Exchange Fund Office Hong Kong Monetary Authority Banking Commissioner Office Currency stability, defined as a stable external exchange value of the currency of Hong Kong, in terms of its exchange rate in the foreign exchange market against the U