Why is Hong Kong exchange rate to USD is almost always 1 USD = 7.8 HKD and why is our bank notes not printed by Hong Kong Central Bank? These two are some of the most common questions we got asked every day.
In short, the Hong Kong Central Bank (Hong Kong Monetary Authority, or HKMA) wants the free market to maintain a fixed currency pegged to the USD for them… You probably would say they are crazy if you are an economist: How could a “free market” maintains a “fixed currency pegged”? This is an inherently contradictory statement!
The “Linked Exchange System” in Hong Kong
To do just that, HKMA offers a fixed exchange rate (1 USD = 7.8 HKD) to only three banks in Hong Kong: HSBC (Hong Kong Shanghai Banking Corporation), Bank of China, and Standard Chartered. This is a fixed offer in which HKMA honours regardless of HKD appreciation/depreciation in the market…
This means the banks can always make a risk-free profit by trading between the market rate and the HKMA fixed offer! These market activities change the amount of HKD in circulation in respond to the HKD appreciation/depreciation, hence the very narrow exchange rate we observe: 1 USD = 7.75 HKD – 7.85 HKD.
Printing HKD
Since the banks already control the HKD circulation in the Foreign Exchange market, they may as well in charge of the HKD circulation in our daily lives! As a result, the HKMA also lets them design and print most of the bank notes we use today.
JUST TO BE SAFE – The HKMA requires these three banks to have at least the same value of USD to support the amount of HKD outstanding in the market (printed or traded). This ensures the HKD is intrinsically supported by USD and the banks will not print more than they need!
The result? Almost all HKD in circulation ($20, $50, $100, $500, $1,000) are printed by these three banks and the HKMA can now proudly proclaim that we are practicing a “free market” to maintain a “fixed currency pegged”!
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