Hong Kong Dollar (HKD)
The official currency of the Hong Kong Special Administrative Region.
What is the Hong Kong Dollar (HKD)?
The Hong Kong dollar is the official currency of the People's Republic of China's Hong Kong Special Administrative Region.
The Hong Kong Dollar has the ISO code HKD and the symbol HK$. It is generally used as a form of payment in Hong Kong.
The HKD is one of the most widely traded Asian currencies around the globe.
Aside from Hong Kong, it is also used in Macau. It is fixed at 1 HKD to 1.03 Macanese patacas and is widely recognized for retail purchases at par or MOP 1.00.
Characteristics Of HKD
The Hong Kong Monetary Authority (HKMA) administered Hong Kong's currency, serving as the country's de facto central bank.
Three commercial banks are authorized to print notes for circulation under the HKMA authorization:
- Standard Chartered
- Bank of China
- Hong Kong and Shanghai Banking Corporation (HSBC)
The three banks print banknotes with their designs in denominations equal to or above 20 HKD, while the Hong Kong government issues all coins and 10 HKD notes.
Key Takeaways
- The Hong Kong dollar (HKD) is the official currency of the Hong Kong Special Administrative Region of the People's Republic of China.
- The Hong Kong Monetary Authority (HKMA) administers the currency, functioning as the de facto central bank.
- Hong Kong transitioned from a currency board system to a floating currency system in 1974.
- The HKD was pegged to the U.S. dollar during the silver crisis in 1873 and experienced changes until the establishment of a peg to the British pound in 1939.
- Since 1983, the HKD has been officially pegged to the U.S. dollar at a rate of HK$7.8 = US$1 under the linked exchange rate system.
The Hong Kong Dollar's History
Due to its unique geopolitical position, Hong Kong was a trading port, and it has a long and notable history of its currency.
Before the emergence of HKD: multiple currencies
There was no native currency in circulation when Hong Kong was formed as a free commercial port in 1841. Indian rupees, Spanish or Mexican eight real coins, and Chinese currency coins were in circulation.
The Early-Stage: Trial Of A Pound-Based System
Because Hong Kong was a British colony from 1841 to 1941 and an overseas territory from 1941 to 1997, the United Kingdom attempted to implement a pound-based system.
The plan did not work because Hong Kong residents were hesitant to use it.
The Birth Of Hong Kong Dollars
A local mint was constructed in 1863 on Hong Kong Island's Cleveland Street in Causeway Bay to mint Hong Kong silver dollar and half dollar coins with the same value and appearance as their Spanish/Mexican counterparts.
The Chinese did not warmly receive the new HKD, which resembled those of Spain and Mexico. The Hong Kong Mint was closed in 1868 with a $440,000 loss.
Banknotes, which are denominated in dollars, of the new British colonial banks, the Hong Kong and Shanghai Banking Corporation, and the Chartered Bank of India, Australia, and China began to circulate in Hong Kong and the broader region in the 1860s.
The Silver Crisis In 1873
The HKD was pegged to the gold standard of the U.S. dollar. Hence the currency depreciated during the 1873 silver crisis.
By 1895, the situation had evolved to the point where Spanish/Mexican dollars were scarce, and authorities in Hong Kong and the Straits Settlements were putting pressure on London to take steps to ensure a steady supply of silver dollar coins.
London eventually agreed, and laws were passed to control the supply of coinage.
The mints in Calcutta and Bombay minted new British trade dollars for use in Hong Kong and the Straits Settlements. The Straits Settlements minted its silver dollar coin in 1906, which was linked to a gold sterling exchange standard and had a set value of two shillings and fourpence.
From 1914 to 1930, when British Weihaiwei surrendered to the Republic of China, the HKD circulated alongside the Chinese yuan in British Weihaiwei.
The division line between the Hong Kong and the Straits units was drawn here.
In 1935, Hong Kong abandoned silver and introduced a peg to sterling of £1 = HK$15.36 to HK$16.45.
The concept of an HKD as a unique currency unit was born during this period.
The government issued one-dollar notes after passing the One-Dollar Currency Note Ordinance that year and the Hong Kong dollar was recognized as the local monetary unit.
It wasn't until 1937 that Hong Kong's legal tender was wholly unified. The HKD was pegged at HK$16 to the British pound in 1939.
The Japanese Invasion And Reemergence Of HKD
During World War II, Japan occupied Hong Kong, and the Japanese yen was used as the national currency.
After the war, however, this currency was outlawed, and the HKD was reintroduced in 1972, tied to the U.S. dollar. It is still tied to the U.S. dollar, with the HKMA fluctuating in value from time to time.
Unique Geo-economical Position Of Hong Kong
After World War II, Hong Kong was required to follow sterling exchange control as a British Empire colony.
Nonetheless, Hong Kong's unusual geoeconomic situation allowed it to operate a dual system with the sterling area and a free exchange market primarily with the U.S. currency, which was illegal from 1949 to 1967.
Hong Kong was a port for trading between the U.K. and the PRC.
The Devaluation Of The Pound In 1967
Even within the sterling region, the U.K. found it challenging to maintain the value of the sterling in the 1960s as the official reserve currency.
With the pound depreciation, the peg between HKD and the pound was broken in 1967.
As a result, HKD depreciated by 10% against the pound and a 5.7 percent devaluation versus the U.S. currency.
Floating Currency System (1974-1983)
Following the United States' termination of gold-to-dollar convertibility in October 1971, Britain abandoned the fixed exchange rate with the dollar.
The HKD has not been anchored in another currency since 1974, marking the transition from a currency board system to a floating currency system.
Linked Exchange Rate System (Since 1983)
The Hong Kong dollar was officially pegged to the U.S. dollar on October 17, 1983, at a rate of HK$7.8 = US$1, reverting to the currency board system.
The peg of the HKD to the U.S. dollar in 1983 took place as part of Sino-British negotiations on Hong Kong's status after 1997.
Post-1997 period
Hong Kong's Basic Law and the Sino-British Joint Declaration stipulate that Hong Kong has sovereignty over currency issuance.
The Hong Kong Monetary Authority, a semi-independent public body, was established in the early 1990s to:
- Regulate banks
- Manage exchange funds
- Serves as the territory's de facto "central bank
- Supervises the government and three local banks in issuing currency.
Hong Kong Note Printing Limited produces banknotes. Only a bank with the equivalent in U.S. dollars on deposit can issue a Hong Kong dollar. Thanks to the currency board system, Hong Kong's whole monetary base is backed by U.S. dollars.
The funds for the backing are held in Hong Kong's exchange fund, one of the world's largest government reserves. Hong Kong also has significant U.S. dollar deposits, with official foreign exchange reserves of $361 billion as of March 2016.
Current Hong Kong Dollar system
The Hong Kong Government Currency Commission, or HKMA, presently controls the issuing of HKD notes. Self-designed notes are issued by the three commercial banks under the HKMA license and circulated throughout the country.
The HKMA also issues some notes on its own. Banknotes are distributed entirely by a central bank or government in most nations. Hong Kong, on the other hand, has a unique system.
Depending on the denomination, banknotes have varied styles and colors, including:
- 10 HKD (Green or purple)
- 20 HKD (Light blue, whereas the old 20 HKD notes are dark blue)
- 50 HKD (White or green)
- 100 HKD (Red)
- 500 HKD (Brown)
- 1,000 HKD (Yellow)
As for coins, the Hong Kong government is in charge of coin production:
- 10 cent coins
- 20 cent coins
- 50 cent coins
- 1 HKD
- 2 HKD
- 5 HKD
- 10 HKD
The Exchange Rate System
Hong Kong began adopting a one-of-a-kind linked trade rate system in 1983 to peg the Hong Kong dollar to the U.S. dollar at a fixed rate of 7.80 HKD = 1 USD.
The HKMA authorizes the three note-issuing banks (Standard Chartered, Bank of China, and HSBC) to issue fresh notes under the special linked exchange rate arrangement if they deposit an equal amount of U.S. dollars with the HKMA.
Renminbi peg discussion
Following the Renminbi's internationalization and inclusion in the Special Drawing Rights, there have been discussions about pegging the HKD to the Renminbi rather than the U.S. dollar.
According to studies, re-pegging the Hong Kong dollar to the Renminbi would require over 2 trillion Renminbi in assets to replace the HKMA's US$340 billion in foreign reserves as of 2015, which is more than the number of existing Renminbi assets in Hong Kong's offshore market.
According to the HKMA, Renminbi deposits and certificates of deposits totaled 1.158 trillion Renminbi at the end of 2014, with outstanding Renminbi bonds totaling 381 billion and Renminbi-denominated loans totaling 188 billion.
In January 2016, however, the Renminbi's and China's financial markets spread to Hong Kong's markets and currencies.
CNH HIBOR, the Renminbi offshore overnight borrowing rate, rose to 66.8% on January 12 when the People's Bank of China – China's central bank – intervened to squeeze out Renminbi short speculators by tightening liquidity at Hong Kong commercial banks.
Investors are concerned that the HKD will be de-pegged from the U.S. Dollar soon, following the PBOC's move into the offshore market and another drop in Chinese stocks.
In response to market speculation, the Hong Kong Monetary Authority announced on January 27 that the HKD's linked exchange rate regime would be protected.
Given mainland China's growing financial power, many investors no longer see Hong Kong as a safe haven as they formerly did. Because mainland China heavily influences Hong Kong's financial markets, the Renminbi exchange rate and China's stock market remain volatile, weighing on Hong Kong markets and the Hong Kong dollar.
Hong Kong Dollar (HKD) FAQs
The HKD is one of the world's most widely traded currencies. The fixed exchange rate between the Hong Kong dollar and the U.S. dollar is 7.80 HK$ for 1 US$. When more differentiation is required, it is abbreviated as HKD.
The most common HKD notes are $10, $20, $50, $100, $500, and $1,000. The three note-issuing banks issue $20, $50, $100, $500, and $1,000 bills. The 2010 Series and various previous series banknotes will continue to be legal currency and circulate alongside the 2018 Series.
There is a possibility that there will be a significant political change in Hong Kong. Nonetheless, the HKD will survive, owing to its legal tender status and use by the government and other public organizations for tax and other payments.
Former Hong Kong Monetary Authority chief executive Joseph Yam Chi-Kwong predicted that the U.S. would not break the peg that binds the HKD to the U.S. dollar, meaning that the HKD will most likely remain tied to the U.S. dollar.
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