Asian Financial Crisis

3.1 Background & History of the Hong Kong Currency Board System

In terms of finance and economic structures, Hong Kong has a lengthy history with respect to running a modern-day currency board. A fixed exchange rate is an exception in many countries but has typically been the norm in Hong Kong. Hong Kong exhibits an extremely externally-oriented economy, one that uses the external value of its currency as an anchor (Chiu 2). From the 1930s to the 1960s, Hong Kong demonstrated a classical colonial currency board, but the banks not the government issued currency. In the late 1960s, Hong Kong switched to a U.S. dollar anchor in place of the British pound that was undergoing forced devaluation. This move also involved changing the Exchange Fund’s assets from pound-denominated securities to dollar-denominated securities.

During the 1970s the U.S. dollar fell sharply. The United States government made the decision to let the dollar float, and the government of Hong Kong adopted the same policy with its own currency. Hong Kong currency floated for a nine year period from 1974-1983, with the economy showing average growth of more than 10% with moderate inflation of 4-6% during the mid-to-late 1970s (Chiu 2). Despite such impressive performance however, by the late 1970s various factors prompted the economy to become overheated. Public construction projects, a booming property market

. . .
te differential between the two currencies involves has a relationship to the linked exchange rate. For instance, if three-month interest rates for the Hong Kong dollar are higher than for the U.S. dollar, this is reflected in the swap price as a premium. It is reflecting as a discount in the swap price if the situation is reversed. The price being zero means that there are roughly equal interest rates between the two currencies. We saw earlier that the linked exchange rate system helps keep foreign investment high. The swap market acts as an indicator of such money flow, “The swap prices of different periods have become reliable indicators of the flow of funds into and out of the Hong Kong dollar, and also the level of confidence in the local currency” (Swaps 1-2). 3.3 Costs of the Peg While we have reviewed many of the benefits and strengths from the linked exchanged rate and peg, there are costs associated with maintaining the peg. The peg appears strong and fiscal reserves are still significant, but problems on the economic horizon for Hong Kong may mean for this situation to continue fundamental changes in economic and fiscal policy are needed. Those who do not support the peg argue that it costs the economy in term
. . .

Some common words found in the essay are:
Hong Kong, Hong Kongs, Exchange Fund, hong kong, Officially HKMA, Joseph Yam, Alan Greenspan, exchange rate, Fund Beginning, Business School, According Kasa, Goldman Sachs, linked exchange, linked exchange rate, hong kong dollar, kong dollar, currency board, hong kongs, exchange fund, financial crisis, kong government, rate peg, hong kong government, exchange rate system, peg linked exchange,
Approximate Word count = 6098
Approximate Pages = 24 (250 words per page)

More Essays on Asian Financial Crisis