Why Does Hong Kong Have Its Own Currency?

I’m leaving for Hong Kong in a few days, and I got to wondering why Hong Kong has its own currency. It used to be a British colony, and now it’s a Special Administrative Region of China, but it never used either British or Chinese currency. Why? Also, why is the HK$ pegged to the US$? Finally, even if you agree that Hong Kong’s status as a major world financial center warrants having its own currency, why the heck does Macau have its own currency?

Most British colonies used their own currencies. As part of the agreement whereby HK was transferred to PRC sovereignty in 1997, HK was permitted to keep its own currency (not to mention customs, immigration, tax regime, laws, driving on the left, trial by jury, freedom of speech, etc etc - the whole capitalist thing). It couldn’t have adopted the PRC’s RMB because the latter is not freely convertible - HK is a free port with no exchange controls.

The peg to the USD was adopted in 1982 (83?) after pre-1997 uncertainties sent the floating currency into a tailspin (up to the 60s it had in fact been pegged to the GBP). It makes sense to have your currency pegged to that of your biggest trade partner. Macau’s Pacata is pegged to the HKD. Macau has its own currency for similar reasons as HK.

There is a case to be made for dollarization - scrapping the HKD as a paper/coins currency and simply use greenbacks. (I think Ecuador did this.) However, this reduces flexibility should a future govt wish to fiddle with the peg. When the RMB is made convertible it would probably make sense for HK to adopt it - it’s already accepted by many stores here (coincidentally being pegged to the USD at roughly the same rate as the HKD). But that’s years away.

Simple conversion method - divide HKD amount by 10 and add 50%. eg - HK$100 /10 = 10 + 50% = US$15. Virtually correct (HK$7.8 = US$1).

Somewhere on my site, there’s an unofficial visitors’ guide. Enjoy your stay!

A giant gorilla has its own currency? Wha? oh, wait… nevermind

I am simplifying but Hong Kong is a currency board system. HK dollars are a currency based on the USD. For every HKD7.76 there is one USD in reserve. The HKD is actually issued by one of three banks (Standard Charterd, HSBC and BOC) and not the government. If speculators attack the currency, it is a natural mechanism to take those HKD out of circulation. You simply can’t attack a currency board that operates in true fashion. Argentina got into trouble because they had their currency board, but then messed with the natural mechanisms that control it.

John Greenwood was the father of the HK peg and still sits on the currency board that meets on a regular basis (IIRC every 2 months). I had dinner with him about a year ago and as he said “I’m not wedded to the currency board, but until you have something better to replace it, don’t change it.”

The RMB or Chinese yuan is not a hard currency, and therefore not suitable for usage outside of China.