What have been the costs and benefits of Hong Kongs Currency Board Essay

What have been the costs and benefits of Hong Kongs Currency Board System since 1983 - Essay Example 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 percent, property market experiencing 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). ‘In less than a month, following a proposal made by Hong Kong business economist John Greenwood, the government announced that it would return to a currency board system, which would pursue an anti-inflationary policy and promote currency stability’ (Schuler). The CBA is an ‘idiosyncratic system since there is actually no currency board, and bank notes are issued by a few designated commercial banks, which alone deal directly with the monetary authority at the fixed exchange rate of HK$7.80 to the US dollar’ (Shu-ki Tsang). The CBA which was ‘also known as the â€Å"linked exchange rate system† or the â€Å"link† has revolved through several stages. From October 1983 – 1987, the Hong Kong government could not even define the monetary base and the theoretical forces of bank note arbitrage and competition did not seem to work’ (Shu-ki Tsang). The exchange rate was strengthened by the government interference in the foreign exchange market and interest rate handling. ‘To provide the Exchange fund with the necessary instruments to conduct â€Å"open market operations†, the Hong Kong government embarked on a series of programs to introduce Exchange Fund Bills (from March 1990) and notes (from May 1993). On the other hand, the LAF, set up in June 1992, allowed the Exchange... This study will critically analyze the costs and benefits of Hong Kong’s currency board system since 1983. The analysis of the essay is achieved in three main sections. First, currency board arrangement is defined. Moreover, the costs and benefits of Hong Kong’s currency board system since 1983 is investigated before finally concluding. ‘Currency board arrangement is a special case of a rules-based monetary system. It is a system based on rules rather than discretion that serves to establish credibility and avoid losses resulting from decisions that can sometimes be undertaken within a myopic timescale’ (Balino 1997). 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 No vember 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. As for its disadvantages, people may doubt the willingness and competence of the government to continue ‘perfect convertibility at the specified rate’