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There is serious inflation here in Hong Kong. I suspect it is caused by QE1 and QE2. I didn't study Economics when I was in school, so I'm not sure I fully understand the situation. Hopefully someone will help me determine if I should exchange my HKD for another currency so that it won't decrease in value.

My understanding is this: when US prints more cash, the value of USD and HKD decrease. So, we need to use more money to buy the same thing. Because there is extra money flowing around in the US and it has nowhere to go, US money is poured into the HK stock market.

With a potential QE3 looming what can I do to protect my wealth from inflation or even hyperinflation brought on by the influx of new currency into the market?

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  • Why on earth would the US money find itself on the HK stock market necessarily?
    – littleadv
    Commented Sep 1, 2011 at 2:48
  • In my view, currency exchange is a valid part of personal finance for people living outside the US. Consider listening to npr.org/blogs/money/2011/08/12/139583229/… for details on why US citizens can comfortably ignore the problem others must face.
    – jldugger
    Commented Sep 1, 2011 at 5:18
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    I tried to edit the question to fit guidelines and help you get the answer you are seeking.
    – user4127
    Commented Sep 2, 2011 at 17:45

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The Hong Kong Dollar is based on the US dollar. The Hong Kong central bank recognizes the US dollar as its reserve currency. That is, the Hong Kong central bank keeps US dollars as its main reserve. Not long ago the reserve currency of choice would have been gold. Central banks of each country would need to have enough gold to back up any currency they issued. Now central banks use the US dollar instead. This is what is meant when people mention the US dollar being the reserve currency for most countries.

From wiki regarding the HK dollar:

A bank can issue a Hong Kong dollar only if it has the equivalent exchange in US dollars on deposit.

So you're assumption is correct: as the US Federal Reserve prints more money and that money finds its way to Hong Kong banks, the Hong Kong banks will be able to issue more Hong Kong dollars which will have an inflationary affect.

What to do? If you look around enough on this site you'll find some suggestions. Here is one.

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I've always understood inflation to be linked to individual currencies, although my only research into the subject was an intro economics course in undergrad and I don't recall seeing why that would be the case.

I guess the basic principle is that currency traders are watching the printing presses and trading in exchange markets to the point that the exchange rates fall in relation to increases in money supply. There's probably something about the carry trade in there as well, but it's late and I took some medications, so someone else will have to carry that torch.

I must admit I've not really paid attention to foreign currencies like HKD, but the proximity and political relationship with China probably greatly complicates your question, since part of the problem has been China's currency peg.

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  • This is kind of true. The problem is the USD is so widely invested in that inflation in the USD affects others. I think there is also some specific pegging of the HKD to the USD.
    – user4127
    Commented Sep 2, 2011 at 17:40

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