Debate over value of a linked currency

PUBLISHED : Monday, 01 March, 1999, 12:00am
UPDATED : Monday, 01 March, 1999, 12:00am

Until 1983, the Hong Kong dollar floated freely. In other words, its value was not controlled by the Government. It was allowed to find its own value in relation to other currencies according to market forces.

Traditionally, the Hong Kong dollar traded at about five to one against the US dollar. This figure sometimes rose and declined by 10 to 20 per cent within short periods of time. One of the drawbacks of this system is that there are many different currencies in the world, and if they all float freely, it can create problems for businesses.

Imagine the confusion when a currency suddenly increases or declines in value. The actual price agreed upon might become too high or too low. For this reason, international businesses often quoted prices in US dollars - rather than the local currency - to guarantee consistency.

By pegging the Hong Kong dollar to the greenback, the Government brought stability to the local currency.

This has served Hong Kong well so far.