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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.