Hong Kong operated a ‘sterling exchange system from 1935 – 1973, excluding the years of Japanese occupation. The sterling exchange system is a currency board with note issue back by holdings of Sterling assets’ (Crosby 2000). Then, ‘between 1972 and 1974, the HK dollar was set at a fixed rate to the US dollar. From November of 1974 until the return of the currency board in 1983, the HK dollar floated freely against the US dollar’ (Hanson). Hong Kong being a Special Administrative Region of China is dependent on mainland demand but its monetary system is still attached to the U.S. If ever China retaliates against pressure for the trade protectionism in the United States, then Hong Kong would be caught in between. ‘Where it comes to the real economy, Hong Kong’s fortunes are increasingly linked to the mainland. its manufacturing base is located across the border, in 2009 mainland tourists accounted for more than half of the total, mainland purchasers accounted for about 1/5th of real estate demand, and mainland firms accounted for more than half of total issues and market capitalization in the Hang Zeng’ (China Analytics 2010).Outside of Tokyo, Hong Kong attracts investors, businessmen, and economists because of its rule of law, its low tax regime and highly urbanized infrastructure. Hong Kong also played a significant part in China’s success economically speaking, posing as a middleman for the mainland’s investments and trade. ‘In September 1982, while Hong Kong was under a free-floating system, officials began to plan for the regions’ future after its return to China. As a result, confidence in the HK dollar and economy began to diminish’ (Hanson). Also that year, the business scenario was not good – the stock market down by 50 per cent, the property market experiencing a downturn and there were runs on the small banks. ‘The value of the HK dollar continued to decrease throughout the year and on September 24, 1983, reached an all-time low of HK$9.55 per US dollar’ (Hanson).
What Have Been the Costs and Benefits of Hong Kongs Currency Board System Since 1983