Recently, with the Federal Reserve's interest rate hike and contraction, which led to fluctuations in the U.S. dollar and the RMB exchange rate, coupled with the adjustment of the global capital market, Hong Kong's capital market was strongly affected. The Hang Seng Index fell from the highest 32,000 points at the beginning of the year to around the current 26,000. What the market is more concerned about is that the exchange rate of the Hong Kong dollar against the U.S. dollar has weakened for several months and repeatedly touched the lower limit. This has caused the Hong Kong Monetary Authority to take action several times and spent tens of billions of Hong Kong dollars to maintain the stability of the Hong Kong dollar exchange rate. The Hong Kong Monetary Authority has passively raised interest rates with the Fed's interest rate hike. It has also caused Hong Kong's real estate market to feel the cold. In the second quarter, Hong Kong's GDP growth rate fell from 4.6% to 3.5%. The downward pressure on the Chinese mainland is increasing, and global trade is cooling down. The Hong Kong economy may be under further pressure. Under such situation, the discussion and even questioning of the Hong Kong linked exchange rate system have continued to heat up.

Historically, whenever the U.S. dollar fluctuates and forms an impact on Hong Kong, there would be calls to change the Hong Kong dollar-linked exchange rate system. It is believed that the lack of independent monetary policy makes Hong Kong lack the means to stimulate the economy. Among such voices, the most famous is that of Joseph Yam, the previous Chief Executive of the Hong Kong Monetary Authority, who pointed out that Hong Kong should review the linked exchange rate system. The background of Yam's proposal at this time was that the Fed's implementation of QE and the continuous appreciation of the RMB have caused the passive increase in liquidity in Hong Kong, which caused the economy to overheat. Yam questioned that, just like the Asian financial turmoil in 1997, the hot money held by foreign investors in Hong Kong has caused huge fluctuations in Hong Kong's financial market. Hong Kong should begin to review the linked exchange rate system. However, this unexpected view made the Hong Kong dollar exchange rate fluctuate greatly. At that time, the Special Administrative Region Government also repeatedly clarified that Hong Kong would adhere to the linked exchange rate system and there is no need to change it.

Now, the 35-year Hong Kong dollar joint exchange system has once again caused controversy under economic fluctuations. As Yam had said, a question that is often being debated is that the "stable Hong Kong dollar exchange rate" defined by a stable U.S. dollar exchange rate. Is it worthwhile to pay the price regardless of the changing environment facing Hong Kong? From the nature of the linked exchange rate system, it inevitably makes Hong Kong's monetary policy largely influenced by the United States. Hong Kong itself is increasingly consistent with the economic development trend of the Chinese mainland, which has formed a different economic cycle from the United States. Therefore, Hong Kong is unable to form a monetary policy that is consistent with the economy, and it is more likely to cause market doubts about the system.

In June of this year, Yam once again published an article to clarify his views, revisited the prospects of the Hong Kong dollar linked exchange rate system, and even discussed the important issues such as the decoupling of the Hong Kong dollar from the U.S. dollar and the relationship with the RMB. In June, when Yam once again talked about the linked exchange rate system, he said that this review of the theory and evolution of Hong Kong's monetary management is to emphasize the determination to keep the exchange rate stable and safe under the special circumstances of Hong Kong, and the importance of optimizing the monetary management system. He emphasized that it is crucial to make meaningful choices in the Hong Kong capital market to provide the alternative of trading medium currency instead of replacing the currency. It is not only a macro-important strategy to re-enter Hong Kong's capital market in the new era, but also a necessary deployment to maintain Hong Kong's currency stability, and to keep Hong Kong's status as an international financial center in accordance with the Basic Law, as well as an action to further internationalize the RMB through the Hong Kong capital market.

Joseph Yam is a guru in Hong Kong's financial sector. During the 1997 Asian financial crisis, he was in charge of Hong Kong's financial authority and had successful deterred Western speculators against the Hong Kong dollar. As a true master of the financial world, Yam continued to care about and explore the prospects of the future exchange rate system of the Hong Kong dollar in 2018; this shows that he sees the importance of the linked exchange rate system of Hong Kong not only from the perspective of Hong Kong itself but from the perspective of the long-term development of China's economy and society.

Anbound's chief researcher Chan Kung believes that for Hong Kong's financial problems, channel construction, market transactions, interest rates, stock prices and price-earning ratios, products and services are very important, but these are only the "general financial practices"; such things have been discussed by numerous experts and scholars every day, many "authorities" participate in the discussions and evaluations as well. Yet, compared with these "financial practices," the system of "macro finance" is the real issue. Once the future of the Hong Kong dollar linked exchange rate system has been shaken, virtually all "financial practices" will be done, at least they will have to be redesigned and reinterpreted.

Regarding the long-standing view of Hong Kong's linked exchange rate system, Anbound has confirmed its views many times and has not changed it. In our view, what is worth discussing is that with the increasing Mainland China's economic and financial influence on Hong Kong Mainland China, under what circumstances will the Hong Kong dollar linked exchange rate system change? That is, how should we understand what the extreme boundary condition is for changing the exchange system? Anbound points out that the adjustment of Hong Kong's linked exchange rate system has a lot to do with the development and reform of the Mainland China, the process of internationalization of the RMB, and the opening of the capital account, and changes in the world economic structure. There are three major conditions: (1) Technically, the RMB must be freely convertible, and the Hong Kong dollar may be linked to the RMB, or simply withdraw from the Hong Kong dollar and switch to the RMB; (2) Internally, the Chinese economy should complete its transformation and structural adjustment, so that it can be on a long-term stable development platform to provide stable economic support for the internationalization of the RMB; (3) From an international perspective, after the economic reform and system reform, China's international status and influence have improved significantly. The internationalization of the RMB has made great progress, and its influence in the international market has significantly improved. When these conditions are met, it is possible for the Hong Kong dollar to abandon the linked exchange rate system. It is only after RMB is linked or adopted that Hong Kong's prosperity can be maintained after changing the monetary system.

However, it should be pointed out that if these conditions are to be met, it would require long-term efforts; at present, there are no conditions for achieving them at all. On the one hand, China's reform process is still not smooth enough. The reform and opening up have entered a period where there are still many challenges. On the other hand, the U.S.-China trade frictions and the international anti-globalization waves also mean that China's integration into the world is far from being smooth. As many conditions are not available, it is too early to talk about the change in the linked exchange rate system in Hong Kong. Most importantly, although the linked exchange rate system is only an exchange rate system arrangement, it is the same as Hong Kong's free port system, Hong Kong's legal system, and the "one country, two systems". It is a fundamental system for maintaining Hong Kong's prosperity and characteristics.

Final analysis conclusion:

From the perspective of the economic system, Hong Kong is "a free port that implements a linked exchange rate system"; this position is indispensable at present and is one of the important pillars of Hong Kong's economic prosperity. The important impact is unquestionable and there should not be any need to change it.