One Year into the Asian Financial Crisis:
The Pros and Cons of Maintaining the Linked Exchange Rate
The linked exchange rate is the pillar of economic stability and the cornerstone of Hong Kong people's confidence in the economy of Hong Kong. It must not be undermined. In the Asian financial crisis, Hong Kong has paid the cost of maintaining the linked exchange rate through high interest rates, high unemployment, the collapse of asset prices and economic recession. Whether the linked exchange rate can be defended successfully depends very much on Hong Kong people's confidence in the Hong Kong dollar. If the confidence is lost, any defence of the linked exchange will be in vain. At present, Hong Kong is beset by the intractable short-term problem of a liquidity crunch. The medium- and long-term problems of competitiveness and economic restructuring are the most fundamental, which Hong Kong must address.