Fixed exchange rates - pros and cons

Before Hong Kong returned to China it was a small but vibrant trading economy. It dealt primarily with the West and a huge proportion of its activity was traded. 'Made in Hong Kong' was as common a sight as 'Made in China' is today.

Fixed exchange rates were the norm from 1945 to 1971. Hong Kong was too small an economy to maintain its own stable currency and so after the collapse of the world fixed exchange rate system they pegged the HK$ it to the US$.

The Hong Kong economy needed a stable exchange rate so that its firms could trade with certainty, knowing what prices to set and what money would be received. But the maintenance of a fixed exchange rate in turbulent times is difficult and imposes costs as well as benefits on the economy concerned.

Hong Kong's problem is that it chose the US$ to fix to. A perfectly sensible choice at the time, but now the US is pumping money into their economy (Quantitative Easing) this is destabilising the US$.

The BBC article below talks about the recent experience and discusses some of the issues.

The BBC article is here