Linked exchange rate

Linked exchange rate system is a type of exchange rate regime to peg the exchange rate of a currency to another. It is the exchange rate system implemented in Hong Kong by Honorary Vice-President at the University of Hong Kong, Professor Y.C. Jao, to stabilise the exchange rate between the Hong Kong dollar (HKD) and the United States dollar (USD). The Macao pataca (MOP) is similarly linked to the Hong Kong dollar.

Unlike a fixed exchange rate system, the government or central bank does not actively interfere in the foreign exchange market by controlling supply and demand of the currency in order to influence the exchange rate. The exchange rate is instead stabilized by an exchange mechanism, whereby the Hong Kong Monetary Authority (HKMA) authorises note-issuing banks to issue new banknotes provided that they deposit an equivalent value of U.S. dollars with the HKMA. The Government, through the HKMA, authorises three commercial banks to issue banknotes:

Notes (HK$10 only) are also issued by the HKMA itself because of the continuing demand for small value notes among the public.

As a response to the Black Saturday crisis in 1983, the linked exchange rate system was adopted in Hong Kong on October 17, 1983 under the recommendation of Y.C. Jao, through the currency board system. The redemption of certificates of indebtedness (for backing the banknotes) were sent out by note-issuing banks to peg the domestic currency against the U.S. dollar at an internal fixed rate of HKD 7.80 = USD 1.

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