The Evolution of the Hong Kong Currency Board during Global Exchange Rate Instability: evidence from the Exchange Fund Advisory Committee 1967-1973

During the 1990s there was considerable enthusiasm for currency boards, particularly for small open economies, until the collapse of the Argentine system in 2001-2 and the subsequent decline of the USD. Since then, currency boards have been used mainly by colonies and by Eastern European countries seeking to dispel the shadow of chaotic monetary episodes by operating currency boards pegged to the Euro. Hong Kong SAR is now by far the largest economy to operate a currency board and no longer conforms either to the colonial rationale, nor to the regime change rationale for a currency board. This system has recently become more controversial because of the intensified economic integration with the mainland, the decline of the USD on world markets and the appreciation of the RMB against the HKD since it adopted a flexible basket peg in July 2005. Several authors who have noted the relatively poor performance of Hong Kong relative to Singapore have recommended a monitored band system similar to Singapore, although this advice came before the RMB regime was changed. In this context, it is timely to reconsider why Hong Kong abandoned the currency board under similar circumstances when their anchor currency was depreciating on world markets, the RMB was appreciating against the HKD and the international monetary system appeared on the brink of disarray.