Amid talk about “financial war”, comments that question the viability of Hong Kong’s Linked Exchange Rate System (LERS) have been raised recently. Some arguments seem purely academic; others seem less well-meant but are misinformed and potentially indicative of a broader geopolitical agenda. These arguments, which fail to appreciate the linked mechanism’s historical successes and strong foundation, have unsurprisingly raised suspicions that they are intended to trigger concerns about, and impair confidence in, Hong Kong’s monetary stability, thus undermining the city’s status as an international financial center.

Against this backdrop, the Asian Financial Forum 2025, which will take place today and Tuesday in Hong Kong, presents a critical platform for global economic leaders and experts to address and dispel such misconceptions with informed, constructive, and academically grounded insights. This forum will provide a space for a robust and informed discussion, where the viability of the LERS can be defended and misconceptions countered.

The LERS, introduced in 1983, has been a cornerstone of Hong Kong’s monetary stability for decades. Its implementation was pivotal in anchoring confidence during volatile economic periods, enabling the city to weather global financial disruptions. From the Asian financial crisis in the late 1990s to the global financial tsunami of 2008 and the recent economic challenges posed by the COVID-19 pandemic, the LERS has consistently provided a stable monetary framework. This stability, as demonstrated by its historical successes, has fostered long-term investments, maintained economic continuity, and cemented Hong Kong’s status as a global financial hub, giving global investors a sense of reassurance about the financial center’s resilience and vitality.

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The LERS is not just a technical policy but a strategic asset supporting the city’s global financial prominence. The argument that the LERS is “outdated” betrays a fundamental misunderstanding, or misinterpretation, of its role and effectiveness. Critics advocating for “monetary flexibility” fail to grasp that the predictability offered by the HK-US dollar peg is a key driver of investor confidence. This predictability, not found in systems with monetary flexibility, is a testament to the LERS’ reliability and merits.

A critical oversight in those critiques questioning the linked system’s continuous viability is the failure to recognize the strength of Hong Kong’s foreign reserves, which provides strong backing to the linked system. As of December, Hong Kong’s official foreign exchange reserves stood at $421.4 billion, exceeding the currency in circulation by five times. This substantial reserve provides enough resources to defend the peg against potential speculative attacks. The Hong Kong Monetary Authority has consistently demonstrated exceptional expertise in managing these reserves, reaffirming its unwavering commitment to safeguarding monetary stability. This formidable financial buffer has not only solidified the resilience of the LERS but also thoroughly disproved allegations of its vulnerability.

Some Western critics who question the sustainability of the linked system dismiss the critical data at the expense of their credibility. Their failure to acknowledge Hong Kong’s financial preparedness is not an oversight but a deliberate omission while advancing a narrative of economic vulnerability. The peg’s strength has been underpinned by the Hong Kong Special Administrative Region government’s prudent fiscal management and dedication to safeguarding the stability of the city’s monetary system.

Another flawed argument frequently raised by critics is that the LERS has undermined Hong Kong’s competitiveness. This claim is not supported by evidence. Hong Kong has a strong record of successfully attracting international investments by serving as a vital bridge between the Chinese mainland and global markets for decades. The stability provided by the peg minimizes exchange rate risks, fostering a business environment that remains highly attractive to multinational corporations and investors alike.

Furthermore, attributing challenges in Hong Kong’s property market to the LERS is simplistic and misleading. The current difficulties in the real estate sector stem primarily from unfavorable economic conditions caused by pandemic-induced disruptions. The city’s high interest rates, as a result of the “monetary inflexibility” attributed to the linked system, are merely a red herring. In fact, the LERS has witnessed several major interest-hiking cycles without causing any great trouble to the local economy.

Rather, the peg has consistently provided the monetary stability necessary for long-term investments, which is essential for sectors like real estate. Weakening or abandoning the peg could exacerbate economic challenges, creating uncertainty that would deter investment rather than encourage it.

The critiques of the LERS cannot be viewed in isolation. They align with a recurring pattern of Western narratives that seek to portray Hong Kong as a “declining” financial center. By questioning the viability of the peg without presenting convincing arguments, these commentators appear to be advancing geopolitical agendas rather than offering genuine economic analyses. Such narratives aim to sow doubt and provoke monetary instability, fully aware of the negative consequences this could have for Hong Kong’s economy and its status as an international financial hub.

The LERS is more than a monetary mechanism; it is a pillar of Hong Kong’s international financial center. By maintaining stability and predictability, the peg supports the efficient and smooth functioning of Hong Kong as an international financial and trading hub.

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The potential consequences of loosening or abandoning the LERS are severe and far-reaching. The peg has provided a stable and predictable monetary environment that underpins Hong Kong’s position as an international financial center. Removing this stability would open the door to speculative attacks like the ones launched during the Asian financial crisis in the late 1990s.

Moreover, such a move could diminish Hong Kong’s strategic importance as a gateway between the mainland and the rest of the world. The potential economic volatility triggered by abandoning the peg could detract from the city’s unique role, undermining its status as a global financial hub. While increased monetary flexibility could potentially offer some benefits, they would be far outweighed by the consequential risks, as they would do little more than expose Hong Kong to unnecessary vulnerabilities.

The LERS has been a cornerstone of Hong Kong’s economic resilience, stability and global financial significance for over four decades. The recent critiques of the mechanism are flawed. They fail to account for the system’s proven track record, the strength of Hong Kong’s foreign reserves, and the broader geopolitical implications of undermining the peg.

The author is a solicitor, a Guangdong-Hong Kong-Macao Greater Bay Area lawyer, and a China-appointed attesting officer.

The views do not necessarily reflect those of China Daily.