An Analysis Of The Paradox Of The Exchange Rate System In Hong Kong

Hong Kong is one of the typical countries which has successfully implemented the Linked Exchange Rate System currently. Relative to other countries, the Linked Exchange Rate System not only has a longer history of implementation in Hong Kong. Also, from the perspective of economic promotion and crisis prevention, the implementation of the Linked Exchange Rate System in Hong Kong is more stable and significantly effective.Beginning from the particularity of the Linked Exchange Rate System, this paper analyzes the effect of promotion Linked Exchange Rate System has on Hong Kong through the processing and presentation of related statistical data. This paper is also concerned about the limitations of the linked exchange rate system itself. In the analysis of the limitations of the Linked Exchange Rate System, the paper considers the particular economic nature of Hong Kong, especially the nature that the general commodity price and the real estate price in Hong Kong are influenced by two different external factors, proposed as "HKD Paradox" under the Linked Exchange Rate System. On the one hand, this paper explores the conduction mechanism of these two different external factors to the prices of Hong Kong by correlation analysis. On the other hand, the paper analyzes conditions and impact mechanism of "HKD paradox". Using a novel analytical framework, the risk of Hong Kong’s Linked Exchange Rate System in a particular economic environment is accounted for.Linked Exchange Rate System can promote Hong Kong’s trade and capital flow, enhance Hong Kong’s industrial restructuring, improve market liberalization and transparency, and increase the credibility of the government’s policies. However, Linked Exchange Rate System is a double-edged sword. Behind its various advantages constantly highlights some problems, such as rigid monetary policy, high inflation and large foreign debt scale, etc.Of course, the limitations of the Linked Exchange Rate System are more than those above. Despite Hong Kong’s political status, lower scale of economy and comprehensive strength, its economic and financial openness is very large. With its role as an international financial center, Hong Kong is no longer a small country in the traditional sense. In addition, the closer trade tie between Hong Kong and the Chinese mainland than U.S. does not reflect the conventional relation between two linked countries. These features increase the complexity and multiplicity of policy target selection of Hong Kong. This paper argues that the specialty and complexity of Hong Kong may cause the collapse of Linked Exchange Rate System under certain conditions.From the perspective of the analysis of "HKD paradox", the current alternative exchange rate systems have some problems. If RMB is freely convertible, and occupies a certain position in the international monetary system in the future, the system of Hong Kong dollar linking RMB is ideal. But before that and in the transition phase, this paper proposes a fixed exchange rate system with the peg of50%RMB and50%U.S. dollar respectively, as a viable alternative plan.