Explainer | Hong Kong dollar peg: what is it and why is it important?

Why was the Hong Kong dollar peg introduced?

On a sweltering hot summer day in September 1983, a long queue of people stood outside a Hong Kong supermarket waiting to snatch whatever groceries they could get their hands on.

The scene, complete with its empty supermarket shelves and frustrated customers, was another sign of plummeting public confidence in Hong Kong’s financial system and underlined the challenges that the government faced in restoring it.

On September 24, 1983, months of consumer and investor anxiety over the rapid depreciation of the Hong Kong dollar, coupled with concern over Chinese and British negotiations about the city’s return to mainland rule, culminated in the so-called “Black Saturday” crisis.

Panic selling of the local currency drove its value to an all-time low of 9.6 per US dollar, down from 6.5 per US dollar at the start of the year, under the floating exchange rate system. Shops began to quote prices in US dollars and refused to accept Hong Kong dollar notes.

Faced with public unrest and wavering confidence in Hong Kong’s banks, which was exemplified by a run on Hang Lung Bank a year earlier, then financial secretary John Bremridge announced the introduction of the linked exchange system, which tied – or pegged – the currency to the US dollar at a fixed rate on October 17, 1983.

The Hong Kong dollar was originally set at a rate of 7.8 per US dollar, although it has been allowed to trade between 7.75 and 7.85 per US dollar since 2005.

The peg’s introduction was an effort by the Hong Kong government to re-establish confidence among individuals, investors and corporations, while sending an implicit message that the city’s financial system was maintaining some distance from mainland China.

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Why Hong Kong pegs its currency to the US dollar

Why Hong Kong pegs its currency to the US dollar