Hong Kong Economy Essay

In 1983, Hong Kong came from economic hardship which saw its domestic investment reduce by 10% in nominal terms. By October the same year, the Currency Board was established to address situations of property devaluation, deterioration in the banking sector, and the Sino-British negotiations which caused a lack of confidence among investors. In May 1984, the government amended the Exchange Fund Ordinance (EFO) to give the financial secretary powers to determine the currency of payment and the rate of exchange. However, non-state issuing banks remained with a contractual arrangement.

In 1985, Hong Kong’s GDP reached an all-time low of 0.4%; thus, outlining the loss in investments. However, this situation was resolved quickly, economic activities resumed, and prosperity and stability were realized. In 1986, one of the initiatives to rectify the prior economic downturn was to take smaller banks into public custody as a way of financial regulation. In 1987, there was a massive inflow on the Hong Kong dollar which rendered the Currency Board approach inadequate. In 1987, a quick action was established to rectify the inadequacy when the management of the clearinghouse under the Hong Kong Association of Banks was mandated to have a clear account run with the Monetary Affairs Branch (Chiu 6). Several new changes were introduced during this period, including the linked exchange rate system. These transformations were aimed to empower Exchange Fund to conduct open market operations and provide the government with more flexibility to manipulate interest rates.

In March 1990, the Exchange Fund was allowed to issue several types of Exchange Fund bills, which were same as short-term Treasury bills. Other economic policy changes followed in 1992, where a discount window was opened to provide banks with liquidity. In December 1992, the Hong Kong Monetary Authority (HKMA) was established to take over the role and power of the Exchange Fund Office and the Commissioner of Banking. The role of HKMA was to adjust interbank liquidity to respond to changes in demand conditions. During the same year, the government introduced the Liquidity Adjustment Facility (LAF) which allowed banks to use eligible debt instruments to access overnight funds. However, in 1994, the country experienced significant inflation. For example, by August 1994, it hit 10% and two months later it dropped to 8%, whereas in January 1995, it slipped back into 10% (Hawkins and Kee 4). These variations were caused by changes in food prices, the weather condition in China, and differences in the growth of wages between traded goods industry and services sector.

In January 1995, the selling pressures on Asian currencies escalated, including an effect on the Hong Kong dollar. In fact, this happened in the aftermath of the Mexican economic crisis.

Nonetheless, this speculation did not last for long and the country quickly restored exchange rates. Towards the end of 1996, an arrangement was made to create RTGS system for interbank transactions. This development required licensed banks to have direct clearing accounts with the Exchange Fund. However, the real test for the country came in 1997 during the Asian economic crisis. There was a liquidity shortage as banks rushed to sell to HKMA more Hong Kong dollars (Chiu 9). The country suffered a serious blow to its economy and its GDP fell to 5.1%. In August 1998, a subcommittee of Currency Board Operations was established to strengthen the Currency Board Arrangement after a significant economic deflation, unemployment, and budget deficit in the country. An explicit commitment was required to win public confidence.

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Works Cited
Chiu, Priscilla. “Hong Kong’s Experience in Operating the Currency Board System.” Hong Kong Monetary Authority, pp. 1-22.
Hawkins, John and Dorcas Kee. “Analysis of Inflation in Hong Kong.” Quarterly Bulletin, vol. 8, 1996, pp. 2-23.