The Hong Kong dollar has been previously linked to the Pound Sterling. In 1971, the Hong Kong dollar was then pegged to the US dollar with a fluctuation limit, after the Sterling area was liquidated. This regime was later changed into a controlled, floating basis, then returning once again to being pegged to the US dollar again in 1983. The purpose for adopting this peg was to prevent the Hong Kong dollar from collapsing amidst a political row between China and the United Kingdom over the future of the city. Ever since 1983, H.K. has adopted a Currency Board Arrangement to fix the exchange rate at HK$7.8 per US dollar.
The Hong Kong Dollar operates under a currency board system. A prerequisite for a bank to be able to issue the Hong Kong dollar is that it must have the equivalent exchange in US dollars on deposit. This system ensures that Hong Kong's entire monetary base is backed with US dollars at the linked exchange rate. The resources for this backing are kept in Hong Kong's Exchange Fund, which is among the largest official reserves in the world.
As of 2005, in addition to a lower guaranteed limit, a new upper guaranteed limit was set for the Hong Kong dollar at HK$7.75 to the USD. The lower limit was lowered from 7.80 to 7.85 in five weeks, by 100 pips each week. The move was made to narrow the gap between the interest rates in Hong Kong and those of the United States. A further aim of allowing the Hong Kong dollar to trade in a range is to avoid the Hong Kong dollar being used as a proxy for speculative bets on a Yuan revaluation.
| Moody's Rating |
| Aa3 |
| S&P Rating |
| AA- |
|
Sovereign credit ratings play an important part in determining a country's access to international capital markets, and the terms of that access. Sovereign ratings help to foster dramatic growth, stability, and efficiency of international and domestic markets. |
What does it look like?
Political Structure
Hong Kong is officially referred to as The Hong Kong Special Administrative Region (SAR) of the People's Republic of China. The Special Administrative Region of China, with its own mini-constitution (the Basic Law), guarantees a "high degree of autonomy" until 2047. This autonomy is presided over by a chief executive appointed by China.
The executive branch?often known as the Executive Council (Exco)-is comprised of 14 ex-officio members and a number of non-official members; each member serves the chief executive in an advisory role. The legislative branch is referred to as the Unicameral Legislative Council (Legco), and is made up of 30 directly elected members and 30 members elected by functional constituencies. The Financial Secretary, along with the Secretary for Monetary Affairs, is in charge of currency administration.
Prominent Figures
The Head-of-State in Hong Kong is President Hu Jintao, also the President of the People's Republic of China. The Chief Executive is Tung Chee-hwa, who was appointed for a second time in March 2002 and resigned on March 10th, 2005. The Chief executive of the Hong Kong Monetary Authority is Joseph Yam.
Unique Characteristics
Hong Kong and China do not utilize the same form of currency. Hong Kong's government intervention with the dollar has the potential to depict possible future actions in store for China. Hong Kong placed a cap on its currency's exchange rate to the US dollar in May 2005, a move that sparked suspicions that China would soon revalue its currency.
Key Economic Factors
Gross Domestic Product: Gross domestic product (GDP) is the key indicator used to gauge the territory's economic situation. GDP measures the total value of production within a specified period of time, before adjusting for spending of fixed capital. When analyzing GDP, measures to focus on are: total real GDP growth, personal and government expenditure, change in consumer demand, terms of trade, and the GDP deflator. As seen, GDP growth has been rather erratic since the turn of the century.
Foreign Trade: Hong Kong's external trade statistics are compiled from information in imports and exports. The data serves as an excellent indicator of trends and movements in the territory's balance of payments. To note is that Hong Kong is largely dependent on foreign trade and sees most of its trade with other countries involving the re-exportation of products. While looking at foreign trade is important, one must remember that the data tends to have little impact on equity, currency or debt markets, unless it is largely above or below expectations. Also significant is the fact that trade in services with the mainland of China are treated as external transactions.
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