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On Thursday of last week, Eddie Yue, the Chief Executive of the Hong Kong Monetary Authority, reiterated his support for Hong Kong’s Linked Exchange Rate System, in the wake of the news that the city’s banking system had slipped below an aggregate balance of HKD 50 billion. Yue’s statements can be distilled into two principal arguments:
1.The Chief Executive noted that the aggregate balance of the banking system is merely a fraction of its overall assets. Furthermore, he pointed out that the banking system holds more than HKD 1.1 trillion worth of Exchange Fund Bills & Notes that can be employed to enhance the liquidity of the Hong Kong dollar whenever necessary.
2.Yue emphasized that the primary objective of the Linked Exchange Rate System is to uphold the stability of the Hong Kong dollar exchange rate, rather than to influence the Hong Kong dollar interest rate.
Regarding the first point, despite the existence of uninformed investors or self-proclaimed experts who hold the view that Hong Kong’s banking system‘s aggregate balance serves as the reserve backing for the linked exchange rate, readers can gain a clear understanding of the security provided by the Hong Kong dollar linked exchange rate from my previous article “Defending the Hong Kong Dollar,” which I wrote in July of last year. Hence, I will not expound on this topic any further. On the other hand, the second point is a subject that I would like to delve into and deliberate upon: is there room for refinement or modification in the Hong Kong dollar Linked Exchange Rate System?