Time to Blow the Whistle

John Greenwood

in Hong Kong's Link to the US Dollar

Published by Hong Kong University Press

Published in print November 2007 | ISBN: 9789622098909
Published online September 2011 | e-ISBN: 9789882207004 | DOI:
Time to Blow the Whistle

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During the recent precipitate slide of the Hong Kong dollar against the US currency, the Hong Kong government had intervened to support the local currency on the foreign exchange market. This chapter discusses the steps the authorities had taken that had undermined their ability to hold the exchange rate steady at some specified nominal rate against the US$. It begins by examining how a normal central bank and banking system operates and how intervention in the foreign exchange market can be made effective. It then examines how Hong Kong's automatic adjustment mechanism under a fixed exchange rate operated in effect like any orthodox central bank would have done and how errors of policy caused Hong Kong's banking system to come off the rails in 1972–74. It also describes how the system now differs from orthodox banking systems around the world. Finally, it explains why operations in the foreign exchange market by the government or Exchange Fund under present institutional arrangements neither tighten the money market nor reduce monetary growth.

Keywords: Hong Kong dollar; US currency; exchange rate; central bank; banking system; automatic adjustment; fixed exchange rate; central bank; foreign exchange market; Exchange Fund

Chapter.  7505 words.  Illustrated.

Subjects: Business and Management

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