1.8. Hong Kong currency board and the Chinese yuan (intermediate). For more than three decades Hong Kong has relied on a currency board to peg its currency against the U.S. dollar at HK$7.80 = US$1. Since 2005, the Chinese yuan has steadily appreciated against the U.S. dollar from Yuan 8.28 = US$1 to Yuan 6.14 = US$1.

a. What is the difference between a currency board and a pegged exchange rate system? Do you believe that a currency board is appropriate for a city-state such as Hong Kong?

b. Has the Hong Kong dollar appreciated or depreciated against the Chinese yuan since 2005? By how much?

c. As an increasing share of Hong Kong’s international trade and finance is conducted with mainland China, do you believe that the Hong Kong currency regime should be reformed? Formulate alternatives that the government of Hong Kong should consider.