What must the issue of Hong Kong currency be backed by?

The issue of Hong Kong currency must be backed by a 100 percent reserve fund. This requirement is a critical aspect of Hong Kong's financial stability and monetary policy, ensuring that each unit of currency issued is fully backed by an equivalent amount of foreign assets, typically held in the form of foreign currencies such as the US dollar.

This practice is rooted in the principle of a currency board arrangement, which aims to maintain the stability of the Hong Kong dollar against major international currencies and to instill confidence among users of the currency. The 100 percent backing by reserves also limits the risk of inflation and provides a safeguard against potential economic shocks, making it a foundational element of sound fiscal management in the region.

Maintaining a 100 percent reserve fund means that the quantity of money circulating in the economy reflects the assets held in reserves, promoting trust in the financial system and helping to stabilize the economy by ensuring liquidity is backed by actual value. This approach distinguishes Hong Kong's monetary system from those that allow for fractional reserve banking, where banks can issue more currency than they hold in reserves.