The Hong Kong Dollar: the eighth most traded currency in the world

The Hong Kong dollar has been through several changes over the last century and a half. Here’s the information you need to know about this strong Asian currency.

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The Hong Kong dollar (HKD, HK$) is the official currency of Hong Kong and Macau. Due to the proximity of the two regions, coupled with the fact that their currencies tend to have similar exchange rates, it was decided that they both should use the same currency. Hong Kong is recognized as one of the world’s top financial centres and has a well-established international financial market, low taxation and almost free port trade, all of which which characterize this nation as a largely service-oriented economy.

The Sino-British Joint Declaration and the Basic Law of Hong Kong let Hong Kong retain complete autonomy when it comes to issuing currency. Three major international banks legally issue this currency, and this happens under the purview of the Hong Kong Monetary Authority. Hong Kong does not have a recognized central banking system, and the Hong Kong Monetary Authority operates as a de facto central bank. The Hong Kong Note Printing Limited prints banknotes.

The Hong Kong Monetary Authority’s main monetary policy objective is to keep exchange rates stable, while staying within the structure of the linked exchange rate system. It does this through monetary operations, systematic management of the exchange funds and any other means it deems essential.

Value and exchange rates of the Hong Kong dollar

The Hong Kong dollar pegs to the US dollar, and to make sure the currency is market driven, individual banks in Hong Kong work to determine interest rates. As part of the linked exchange rate system, Hong Kong benefits through strong official reserves, a flexible economic structure and a sound banking system.

From 1863 to 1935 the Hong Kong dollar followed the silver standard, where silver dollars served as legal tender. From December 1935 to June 1972, the Hong Kong dollar moved to the sterling exchange rate regime. From December 1935 to November 1967, the sterling was valued at HK$16, and from November 1967 to June 1972, the sterling traded at HK$14.55.

From July 1972 to November 1974, the Hong Kong dollar pegged with the US dollar. From June 1972 to February 1973, one US dollar traded at HK$5.65, and from February 1973 to November 1974, one US dollar was valued at HK$5.085.

Hong Kong decided to go the free floating way in November 1974, and it stayed with this system until October 1983. The first two years went rather well, however, a rapid increase in the supply of credit along with money growth from 1977 led to the currency’s continual depreciation, double-digit inflation and a deteriorating trade balance. At this point, Hong Kong’s monetary policy framework was rather basic – to do away with the external monetary anchor, which led to considerable volatility in almost all aspects.

In 1975, the region’s GDP dropped to 0.3%, and by 1976 it reached 16.2%. There was a significant rise in inflation, which increased from 2.7% in 1975 to 15.5% in 1980. The Hong Kong dollar’s value took a beating as well. In 1981, one US dollar was valued at HK$5.13, and by 1983 one US dollar traded at HK$9.60.

By 1983, speculative attacks surrounding the future of Hong Kong peaked, which was another factor that led to the currency’s depreciation. In September 1983, the Hong Kong dollar dropped to its lowest, trading at HK$9.60 against the US dollar.

In October 1983, after taking into account the growing anxiety about the reliability of some banks as well as currency panic, the government announced a new policy in order to bring stability to the currency. Since then, the Hong Kong dollar has traded at around HK$7.80 against the US dollar.

The table below gives you an indication of how the Hong Kong dollar performed against some leading currencies over time.

1999 2000 2005 2010 2015
US dollar 7.8097 7.7779 7.7925 7.7610 7.7530
Euro NA 7.8754 10.2403 11.0773 9.0412
Pound sterling 12.8823 12.7337 14.6615 12.5345 11.7680
Canadian dollar 6.6644 5.3693 6.3737 7.4331 6.4421
Chinese Renminbi yuan NA 0.9394 0.9404 1.1355 1.2616

These figures are from the month of January for each corresponding year. The Hong Kong Monetary Authority is now equipped to monitor and inspect destabilizing factors that may hit the region’s financial market. In recent times, electronic finance trading is having a noticeable effect on Hong Kong’s financial market.

Hong Kong, as per the Index of Economic Freedom, continues to enjoy the highest degree of economic freedom seen anywhere in the world, ever since the index’s inception in 1995. Positive non-interventionism is the basis of Hong Kong’s economic governance, and it remains highly dependent on global finance and trade. In 2009, the global financial turmoil resulted in the region’s economic growth dropping by 2.8%.

History of the Hong Kong dollar

In 1841, upon Hong Kong’s establishment as a free trading port, the region did not have any local currency, and the use of foreign currencies like Indian rupees, Spanish and Mexican pesos as well as Chinese coins was quite common. While the British government tried to introduce the use of sterling silver coinage in Hong Kong, it failed, as it did in its North American colonies. This was mainly due to the strong local following of the Spanish dollar system.

In 1863, the British government, through the Royal Mint in London, started issuing special subsidiary coinage for Hong Kong, and in 1866, it even established a local mint in Hong Kong. However, the Chinese did not receive these new dollars well, which led to the closure of the mint in Hong Kong by 1868. By the 1860s, banknotes from the Hong Kong and Shanghai Banking Corporation and the Chartered Bank of India, Australia and China began circulating in the region, and these were denominated in dollars.

By 1895, the death of Mexican dollars saw the British government enacting new legislation in an attempt to regulate coinage in Hong Kong and the Straits Settlements. At this point, mints in Bombay and Calcutta started coining new British trade dollars. In 1906, the Straits Settlements started issuing their own silver dollar coins.

In 1935, Hong Kong was the last to abandon the silver standard, soon after China, and it pegged to the sterling. It was only at this point that the concept of the Hong Kong dollar as a separate unit came into being. Unification of the Hong Kong dollar as the region’s legal tender took place only in 1937.

Coins and banknotes of the Hong Kong dollar

The introduction of 1 mil, 1 and 10 cent coins took place in 1863, and 5 and 20 cents, and half and 1 dollar coins came about in 1866. The 1 mil coin came with a hole, and it and the 1 cent coins used bronze in their making. All other coins used silver. In 1866, production of 1 mil coins ceased, and the issue of 1 cent coins stopped in 1934.

In 1937, cupronickel coins entered the picture, and the use of nickel-brass began in 1977. By 1993, before establishment of the SAR, there began a gradual withdrawal of coins with Queen Elizabeth II’s portrait. Most coins and banknotes now feature the Bauhinia flower or other local symbols. Hong Kong coins come in denominations of 5c, 10c, 20c, 50c, $1, $2, $5 and $10.

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The Hong Kong Monetary Authority governs the issuing of banknotes. Banks that issue their own banknotes under licence include the Bank of China (Hong Kong) Limited, the Hong Kong and Shanghai Banking Corporation Limited and the Standard Chartered Bank (Hong Kong) Limited. Modern day Hong Kong dollar notes come in denominations of $10, $20, $50, $100, $500 and $1,000.

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