Hong Kong's Link to the US Dollar
The currency board explained by the economist who designed the peg.
Summary
John Greenwood designed the currency board arrangement that Hong Kong adopted in October 1983, and this volume gathers the articles he wrote in Asian Monetary Monitor before, during and after that decision, with retrospective commentary. The core analytical claim is set out in the 1983 pieces: Hong Kong's floating rate had become unanchored because the territory had no central bank and no independent monetary policy target, so the currency responded to political news about the future of the colony with no nominal anchor to stop it. Greenwood's proposal fixed the exchange rate by requiring note-issuing banks to surrender US dollars at 7.80 to obtain Certificates of Indebtedness.
The book then documents how the arrangement behaved in practice. Greenwood explains the difference between the automatic currency board mechanism operating at the note-issue level and the cash arbitrage that had to work through the interbank market, and he is candid that the original design left the interbank rate loosely connected to the note-issue rate. He covers the 1987 and 1997 to 1998 speculative attacks, the double play against currency and equity market, the government's share purchases in August 1998, and the seven technical measures introduced in September 1998 that added a discount window and made the link closer to a textbook currency board. The 2005 convertibility undertakings, which created a band of 7.75 to 7.85, appear in the later material.
The collection is a primary source rather than a synthesis, and it argues one side of a long dispute. Readers should know that Greenwood is defending his own design against critics who wanted a peg to a basket, a float, or later a renminbi link. The material is technical and assumes familiarity with monetary base accounting. It has become more dated as Hong Kong's economic cycle has converged with China's rather than with the United States', a divergence Greenwood addresses but does not resolve.
Key takeaways 7
- A currency board removes discretionary monetary policy and therefore removes the discretion that speculators attack.
- Hong Kong's 1983 currency collapse came from the absence of any nominal anchor, not from a fundamental balance-of-payments problem.
- The link operates through the note-issue mechanism, and the connection between that mechanism and interbank rates required later engineering to become reliable.
- The 1998 double play succeeded partly because the automatic interest-rate adjustment under the original design was too violent to be politically tolerable.
- The seven technical measures of September 1998 converted a partial arrangement into something close to a full currency board.
- A small open economy can accept imported monetary policy provided its labour and asset markets adjust prices instead of quantities.
- Hong Kong's price level, not its exchange rate, carries the burden of adjustment, which produces long deflations after asset booms.
Who should read it
Investors and policymakers who need the design logic and failure modes of currency boards from the person who built the best-known modern example.
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