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
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.
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?
What the weakest Hong Kong dollar in 30 years means for firms, workers and travellers
Who handles Hong Kong’s money?
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.
Hong Kong’s dollar weakens to three-decade low, testing city’s resolve to defend currency peg
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