Linking the Hong Kong Dollar to the SDR: An Increasingly Attractive Option

Since 1983, the Hong Kong dollar has been linked under a modified currency board mechanism to the US dollar. This arrangement has maintained confidence in the Hong Kong dollar's value, and is generally regarded as a success. Yet this confidence has been bought at the cost of volatility vis-à-vis other currencies and volatility in the economy as a whole. Geopolitically, as a Special Administrative Region of China, Hong Kong may find a link to the US dollar unsustainable, particularly if US-China tensions worsen. However, linking to China's RMB will not be a sensible option as long as convertibility of the RMB remains restricted. Linking the Hong Kong dollar to the IMF's SDR, which includes the RMB, would be a possibility in the future—the more attractive if by then there is wider use of the SDR.