All about the Hong Kong dollar

In the early 1800s massive loads of tea arriving from China kept English society lubricated. The United Kingdom shipped back clocks and fancy watches as payment but there was so much tea coming into England that the British started exporting opium, then legal to grow in Britain, to balance the trade books. The Qing Dynasty objected to the flow of drugs into its country and the First Opium War erupted over the matter in 1839. When a peace treaty was signed three years later Great Britain was in possession of Hong Kong Island off the coast of southeast China.  

When the British set up Hong Kong as a trading post the crown attempted to introduce its sterling silver coinage as everyday currency on the island, as it did with all its far-flung colonial possessions. But the pound sterling failed to find favor with the Cantonese people who used the Spanish dollar for everyday transactions. After two decades of trying the British gave up the currency battle and began issuing special Hong Kong dollars in 1863. In 1935 when Hong Kong abandoned the silver standard the Hong Kong dollar became its own distinct unit of currency; today it is the eighth most traded currency in the world. 


Despite that popularity the Hong Kong dollar occupies an odd place amongst world currencies. Most importantly Hong Kong is not its own sovereign country, it is essentially an autonomous region of China. Some day, although it is not likely to happen any day soon, the Chinese government is likely to allow free trading of its currency, the yuan, and the Hong Kong dollar would likely disappear altogether. Not many countries operate with two official money standards - it would be like if the United States continued to traffic in Confederate dollar notes after the Civil War. 

Even without its dim future the Hong Kong dollar's present is a strange one. It functions primarily to transact actual business and is not easily tradable. Hong Kong dollars are not backed in metal specie but by the strength of the American dollar. Only if issuing banks have an equivalent amount of United States cash on hand will a Hong Kong dollar be issued. The whole business is overseen by the Hong Kong Monetary Authority which does not allow its dollar to be traded freely.

The Hong Kong Monetary Authority keeps a tight rein on its dollar and seldom allows its value to shift up or down by more than a small fraction. This suffocating range of movement discourages retail investors from speculating in the forex markets. Only the largest banking houses with access to lightning-quick computers can expect to reap any profits trading on the minute vacillations of the Hong Kong dollar. 

The Hong Kong dollar remains relevant in the world currency market, however, as the currency with which business is conducted in one of the globe's key business hubs. Only New York City, London, Paris and Tokyo can rival the billions of dollars that pass through the Hong Kong market each year. All in Hong Kong dollars.

---