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City Weekend

Money, money, money – why does the Hong Kong government have so much cash?

After the local currency falls and officials unveil another bumper surplus, City Weekend explains Hong Kong’s financial system and its ballooning public coffers

PUBLISHED : Saturday, 24 March, 2018, 7:30pm
UPDATED : Sunday, 25 March, 2018, 12:12am

While the Hong Kong dollar plummets to its lowest value in three decades, the government announced last month that for the 14th year straight, the city had recorded a budget surplus.

The trading range for the local currency is HK$7.75 to HK$7.85 per US dollar. This month its value has teetered at HK$7.8337. However, behind this dip, the city’s Exchange Fund has trillions in fiscal reserves. The fund is used to buy or sell Hong Kong dollars to influence the value of the currency.

Last month officials announced a record budget surplus of HK$138 billion (US$17.6 billion), with a prediction that the figure could balloon to as much as HK$180 billion by the end of March.

On December 31 last year, the city’s financial reserves stood at a whopping HK$1.7 trillion.

With all this talk of money, City Weekend explores the history behind the colourful bills Hong Kong is infatuated with.

How did this surplus arise?

Each year the Hong Kong government budgets how much it will need to spend for each of its eight sectors, including education, security and infrastructure. The simple reason for the surplus in money is the conservative approach the city takes to spending. Officials are obliged to follow the rules on fiscal spending laid out by Article 170 of the Hong Kong Basic Law, the city’s mini-constitution: keep expenditure within the limits of revenue; strive to achieve a fiscal balance and avoid deficits; and keep the budget commensurate with gross domestic product.

In addition, the city’s red-hot property market has fuelled stamp duty revenues and a windfall from the sale of government land, meaning the city’s revenue surplus has been underestimated for nearly 10 consecutive years.

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Who handles Hong Kong’s money?

The Hong Kong Monetary Authority is the governmental currency board and also the de facto central bank for Hong Kong and the Hong Kong dollar. The aim of the authority is to maintain currency stability to safeguard the economy.

Under licence from the authority, the city has three money-printing commercial banks: Bank of ChinaStandard Chartered, and HSBC. All coins and HK$10 notes are issued by the Hong Kong government, but each of the three private institutions issues its own designs for the HK$20, HK$50, HK$100, HK$500, and HK$1,000 bill denominations. The banknotes are printed by Hong Kong Note Printing Limited.

Macau also circulates the Hong Kong dollar, contributing to the currency’s status as the 13th most traded in the world as of 2016.

History of the Hong Kong dollar

Hong Kong was established as a free trading port in 1841, but it wasn’t until 1863 that Britain began issuing special coinage as a subsidiary of the British pound – marking the start of the Hong Kong silver dollar and half dollar coins. Later that decade, HSBC and Standard Chartered – then known as the Chartered Bank of India, Australia and China – began to circulate the Hong Kong dollar in the city. 

In 1935, the Hong Kong dollar, as its own entity and distinct currency, was born, with a fixed peg of one British pound to HK$16 two years later. Since 1972 the local currency has been pegged to the US dollar in a unique type of exchange rate regime. The current fixed link rate was established in October 1983 after nine years of exchange rate volatility.

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Pegging: the US dollar vs the Chinese yuan

In Hong Kong, the three banks tasked with issuing the currency can only do so when they have the equivalent exchange in US dollars on deposit, due to the linking of the two currencies.

The resources for this backing are kept in Hong Kong’s Exchange Fund, the same fund that oversees the city’s annual monetary surplus. It is among the largest official reserve funds in the world. As a result of this linked exchange system, Hong Kong’s foreign currency reserves held US$361 billion as of 2016. 

Since the internationalisation of the mainland Chinese currency, the yuan, debate has raged over the idea of pegging the local dollar to it instead of the greenback. The discussion is important given Hong Kong’s increasing financial and economic ties to Beijing. However, the Monetary Authority in 2013 said that more than two trillion yuan would be required to re-peg the Hong Kong dollar, since its US dollar reserves would need to be replaced with yuan. But as China’s capital market continues to stabilise and open up, Hong Kong’s potential repegging could be a future possibility.

The peg to the US dollar has protected the city from successive financial crises that have rocked Asia in the past 30 years. A new peg would markedly change both local and international markets, altering the cornerstone of Hong Kong’s financial and monetary stability that has been backed by the US dollar for decades.

A run on the banks?

In the city’s 46-year history of being pegged financially to the US dollar, a few bank runs have occurred – all of which were brought under control. Most recently, a run occurred in 2008 on the Bank of East Asia out of concerns for the bank’s solvency.

Worries have arisen that a rush on banks could occur if the Hong Kong dollar were depegged from the greenback. The hope, however, is that the fiscal reserves and protections of the Basic Law, including its prohibition of the government running a significant deficit as an effort to stimulate the economy, would be enough to support the currency.

The government and the Monetary Authority are focused on protecting the currency and the fiscal reserves, but some worry this manifests in neglect of social welfare spending, while billions sit in the public coffers.


Interesting facts about the Hong Kong dollar

One of the world’s most traded currencies

Pegged to the US dollar at HK$7.80

Used in Macau, where the local currency, the pataca, has a similar value

Design and colour vary by denomination and issuer

In January, HK$20 billion was withdrawn from Macau ATMs