There are two questions :

(a) Is the HKMA under a constitutional or legal duty to adopt a currency board system?

(b) Is the fixed exchange rate of HK$ 7.80 to US$ 1 written in the law?

The answer to both questions is NO.

The Basic Law does not require the HK government to adopt a specific exchange rate regime. Article 111 of the Basic Law only states that "the issue of Hong Kong currency must be backed by a 100 per cent reserve fund." This means that the issue of the HKD must be backed by some form of reserve, whether it is hard currency, gold or Treasuries. But this requirement could be met with a floating or fixed exchange rate.

Article 111 also states that "the system regarding the issue of Hong Kong currency and the reserve fund system shall be prescribed by law." And that relevant law is the Exchange Fund Ordinance, which again does not say Hong Kong is to run a currency board system.

Section 3 of the Exchange Fund Ordinance states that the (primary) purpose of the Exchange Fund is to affect, as the Financial Secretary thinks fit, the exchange rate of the HK dollar. The Financial Secretary, when exercising this power/discretion, shall consult the Exchange Fund Advisory Committee.

All the above mean that the HKMA is under no constitutional or legal requirement to maintain the currency board nor the fixed exchange rate of 7.80. No new legislation is needed if the peg were to go or if the HKD were to devalue/revalue. Decisions on these matters rest entirely with the Financial Secretary in consultation with the Exchange Fund Advisory Committee (or in practice, the HKSAR Administration).

The lack of legal backing behind the currency link is actually rather unique in Hong Kong. I understand that Argentina, Bosnia-Herzegovina, Bulgaria, Estonia and Lithuania have all got laws governing their currency board setup (see a research paper by Professor Tsang Shu-Ki of the Baptist University, published in the August 1999 issue of the HKMA's Quarterly Bulletin). Having legislation to underpin a currency link is often used as a way to increase the credibility of the link, particularly when the link is introduced at a time of much uncertainty. But using legislation to confine the powers of the government also brings with it inflexibility and problems of its own.

The absence of legal backing (or constraint) for the HKD link does not mean that the HK government would change the arrangements for the HKD any time soon. In fact, Joseph Yam told reporters yesterday in a public function that both the Chief Executive and the Financial Secretary have said that the linked exchange rate of the HKD would not be changed. My gut feeling is that speculation on HKD forwards would die down for sometime.