Download LCQ19: Linked Exchange Rate (7

Press Release
LCQ19: Linked Exchange Rate
Wednesday, November 7, 2001
Following is a question by the Hon Emily Lau and a written reply by the Secretary
for Financial Services, Mr Stephen Ip, in the Legislative Council today (November 7):
Question:
Regarding the linked exchange rate system, will the Executive Authorities inform this
Council:
(a) of the advantages and disadvantages of maintaining the linked exchange rate system;
(b) other than maintaining the linked exchange rate system, of the options the Hong Kong
Special Administrative Region may have regarding exchange rate systems; and
(c) of the circumstances under which the authorities will consider adjusting or changing
the linked exchange rate system?
Reply:
(a) The Linked Exchange Rate provides a stable, predictable and well understood
monetary system that is well suited to Hong Kong's highly external and flexible economy
and to its position as an international financial centre. The Link enables Hong Kong's
economy to adjust to external shocks without the damage and volatility of a sudden
currency collapse. It provides Hong Kong with a firm monetary anchor which, among
other things, reduces the foreign exchange risk faced by importers, exporters and
international investors. The disadvantages of the Link are that it ties Hong Kong to US
monetary policy at times when the economic cycles of Hong Kong and the US may not
necessarily be moving in tandem (though this is not the case at present), and that it rules out
the use of nominal exchange rate movements as a mechanism of adjustment. Adjustments
to changes to external factors have to work through the real sector through inflation or
deflation. Nevertheless, the advantages of the Link outweigh its disadvantages. There is
no plan or intention to change the Linked Exchange Rate system.
(b) Theoretically, a range of alternative exchange rate systems are available to Hong Kong,
although any exchange rate system brings both advantages and disadvantages to the
economy.
(c) As explained above, there is no plan or intention to adjust or alter the Linked
Exchange Rate system.