One country, two currencies: The adoption of the Hong Kong currency board, 1983

Currency boards have had an enduring attraction as a solution to exchange rate and monetary credibility for small open economies, despite few successful examples. In this context, the case of Hong Kong stands out for its longevity; it survived the handover to China, the Asian financial crises in 1997, and the global crises in 2007-8 and 2020. The 1983 currency crisis and the decision to link the exchange rate to the US$ is usually treated as an outcome of local political uncertainty due to the Sino-British negotiations which set the framework for how Hong Kong would fit with the rest of China after 1997. We present fresh archival evidence from Hong Kong and London to reveal the year-long debates over Hong Kong's monetary system after a drop in the exchange rate in September 1982 and to demonstrate how most of the protagonists in Hong Kong and London came only reluctantly to accept the idea of re-pegging the dollar once public expectations had been raised. We also show how the mixture of currency and banking instability affected the terms of the negotiations in 1982 and 1983 and set the framework for the one country, two currencies system that prevails today.