Currency issuance system of commercial banks: Hong Kong is one of the few regions in the world where commercial banks issue currency. There is no central bank in Hong Kong. The note-issuing institutions are HSBC, Standard Chartered Bank and Bank of China. They use foreign exchange as reserves and exchange interest-free "bonds" from the Exchange Fund as the basis for issuing money. To put it bluntly, when issuing Hong Kong dollars, banks must hold 100% of US dollars of the same value. Adopt a full reserve system.
There are many exchange rate systems in Hong Kong: linked exchange rate and market exchange rate. In principle, the Hong Kong Government will not interfere with the exchange rate of the Hong Kong dollar. On the one hand, the exchange rate of the Hong Kong dollar is determined by market supply and demand. On the other hand, due to the particularity of Hong Kong dollar hairstyle, Hong Kong dollar adopts the absolute linked exchange rate, that is, HK$ 7.8 1 USD. When the dollar rises, the Hong Kong dollar issuing bank will increase its holdings in exchange for the spread, and the Hong Kong dollar will strengthen. This approach has several advantages:
1. As a highly open economy, with an open capital account and a large amount of international capital flowing, linking the exchange rate can reduce exchange rate risk, reduce uncertainty in economic activities, reduce transaction costs and promote the development of import and export trade.
2. Restrain the government's financial system, so as not to cause the money market to expand and then cause market fluctuations. The monetization of Hong Kong's fiscal deficit (that is, the government issues bonds for sale in the open market, note-issuing banks buy government bonds in the market, the liabilities on the government's balance sheet increase, the income on the note-issuing banks' balance sheet increases, and a liability is created at the same time, that is, the issuance of money) is unlikely, the fiscal debt ratio is low, and the surplus is large. The medium-term goal is also to balance fiscal revenue and expenditure.
The American financial system has a great influence on the Hong Kong market, and the US dollar is the main settlement currency of Hong Kong's foreign trade. Therefore, it is very wise to bind to the dollar.
Disadvantages also include:
1, which limits the capital expansion of Hong Kong. The government cannot stimulate the market by issuing additional money, and the money market can only expand further after it is reflected in the real figures on the government balance sheet. In other words, there must be a solid fiscal and trade surplus to issue more money.
2. In fact, what Hong Kong has done violates the ternary paradox theorem. It not only implements a fixed exchange rate, but also wants to have free capital flow and an independent monetary policy. If Hong Kong implements an expansionary monetary policy-interest rate falls-capital outflows, and the pressure of the depreciation of the Hong Kong dollar-the government recovers the Hong Kong dollar, the supply target cannot be achieved. Hong Kong's monetary policy passively follows the policy changes of the Federal Reserve.
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