Description
This is a ppt about Hong Kong Currency Board.
Flow of presentation
? What is a currency board
? History of Hong Kong dollar exchange rate regimes ? Mechanism of maintenance of link
? Effectiveness of the peg Esp for Hong-Kong
? Advantages ? Limitations of currency bored ? The South-East Asian Currency ? Double play and preventive measures
Currency Board
Monetary authority is required to maintain a fixed exchange rate with a foreign currency Maintains absolute, unlimited convertibility with no restrictions on current or capitalaccount transactions Does not lend to the government
• Does not act as a lender of last resort to commercial • Government is not able to monetize the deficits
Stability of Hong Kong dollar
? Flexible and responsive structure of Hong Kong
economy ? Strong banking system able to cope with the fluctuations in the interest rates ? Hong Kong possesses ample foreign currency reserves for supporting the Link ? six times the currency in circulation – one of the highest levels in the world.
Disadvantages
? A currency peg rules out the use of nominal exchange
rate movements as a mechanism of adjustment ? In case of a misalignment between Hong Kong and US economic cycles, local interest rates, which closely track their US dollar counterparts, may not be best suited to the macroeconomic conditions of the domestic economy
Advantages
? 1987 stock market crash ? The Gulf War in 1990
? The Exchange Rate Mechanism turmoil in Europe in
1992 ? The Mexican currency crisis of 1994/ 95 ? The Asian financial crisis of 1997/98 ? A stable exchange rate has prevailed through all these crises
Asian crisis
? Monsoonal- a common cause stemming from the
industrial countries and affecting the emerging economies in the same way ? Spill over effect-crisis in one country entailing a modification of macroeconomic fundamentals in another ? Pure contagion effect- Shift in market sentiment about the fundamentals of a country triggered by a crisis elsewhere
Effects of Asian crisis
Collapse of Thai Bhat after 24 hours of Hong Kong becoming a part of China Consistently higher inflation in Hong Kong as compared to US Downward speculative pressure on Hong Kong dollar
Monetary authorities spent more than US$1 billion to defend the local currency
HKMA in fire fighting mode
Interest rate hike due to large net sales of local currency
On 15 August 1998, it raised overnight interest rates from 8% to 23% And at one point to 500% of overnight increase
The rate hike, however, increased downward pressure on the stock market
Allowing speculators to profit by short selling shares Further pressure on the interest rates
The HKMA started buying component shares of the Hang Seng Index in mid-August
The Government ended up buying approximately HK$120 billion (US$15 billion) worth of shares in various companies The Government started selling those shares in 2001, making a profit of about HK$30 billion (US$4 billion)
Double Attack
Expectations of a Hong Kong dollar devaluation High cost for the Hong Kong economy of supporting the exchange rate Sales of HS1 futures Purchase of HS1 PUTS Short sales of stocks
Increase in the interest rates
Sales of Hong Kong Dollars
Thank You
doc_967602394.pptx
This is a ppt about Hong Kong Currency Board.
Flow of presentation
? What is a currency board
? History of Hong Kong dollar exchange rate regimes ? Mechanism of maintenance of link
? Effectiveness of the peg Esp for Hong-Kong
? Advantages ? Limitations of currency bored ? The South-East Asian Currency ? Double play and preventive measures
Currency Board
Monetary authority is required to maintain a fixed exchange rate with a foreign currency Maintains absolute, unlimited convertibility with no restrictions on current or capitalaccount transactions Does not lend to the government
• Does not act as a lender of last resort to commercial • Government is not able to monetize the deficits
Stability of Hong Kong dollar
? Flexible and responsive structure of Hong Kong
economy ? Strong banking system able to cope with the fluctuations in the interest rates ? Hong Kong possesses ample foreign currency reserves for supporting the Link ? six times the currency in circulation – one of the highest levels in the world.
Disadvantages
? A currency peg rules out the use of nominal exchange
rate movements as a mechanism of adjustment ? In case of a misalignment between Hong Kong and US economic cycles, local interest rates, which closely track their US dollar counterparts, may not be best suited to the macroeconomic conditions of the domestic economy
Advantages
? 1987 stock market crash ? The Gulf War in 1990
? The Exchange Rate Mechanism turmoil in Europe in
1992 ? The Mexican currency crisis of 1994/ 95 ? The Asian financial crisis of 1997/98 ? A stable exchange rate has prevailed through all these crises
Asian crisis
? Monsoonal- a common cause stemming from the
industrial countries and affecting the emerging economies in the same way ? Spill over effect-crisis in one country entailing a modification of macroeconomic fundamentals in another ? Pure contagion effect- Shift in market sentiment about the fundamentals of a country triggered by a crisis elsewhere
Effects of Asian crisis
Collapse of Thai Bhat after 24 hours of Hong Kong becoming a part of China Consistently higher inflation in Hong Kong as compared to US Downward speculative pressure on Hong Kong dollar
Monetary authorities spent more than US$1 billion to defend the local currency
HKMA in fire fighting mode
Interest rate hike due to large net sales of local currency
On 15 August 1998, it raised overnight interest rates from 8% to 23% And at one point to 500% of overnight increase
The rate hike, however, increased downward pressure on the stock market
Allowing speculators to profit by short selling shares Further pressure on the interest rates
The HKMA started buying component shares of the Hang Seng Index in mid-August
The Government ended up buying approximately HK$120 billion (US$15 billion) worth of shares in various companies The Government started selling those shares in 2001, making a profit of about HK$30 billion (US$4 billion)
Double Attack
Expectations of a Hong Kong dollar devaluation High cost for the Hong Kong economy of supporting the exchange rate Sales of HS1 futures Purchase of HS1 PUTS Short sales of stocks
Increase in the interest rates
Sales of Hong Kong Dollars
Thank You
doc_967602394.pptx