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Content 1. Introduction 2. The mechanism of the Linked Exchange Rate System 3. Pros 4. Cons 5. Alternatives 6. Conclusion 7. Reference Introduction The linked exchange rate regime was originated for a one-time need to contain the sharp depreciation of HK$ on 17 October 1983, in reaction to a currency crisis arising from the Sino-British dispute concerning the political future of HK after 1997. Capital were flowing out of HK and led to a further loss of confidence in HK dollar. In fact, there are other countries that are engaged in similar fixed exchange rate regime, like Argentina, Bulgaria, Estonia and Lithuania. Back to Hong Kong, under the pegged system, she enjoyed an annual per capita GDP growth of 5% from 83-92. The foreign currency assets of HK, including those held in the Land Fund, were US$ 98.1 billion at the end of January 1998. According to Professor Milton Friedman, ¡§a small country is better off linking its own currency to that of a major country, particularly one with which it has close economic relationship, which is a major trading partner¡¨. The more flexible an economy is, the more suitable is a fixed exchange rate to it, because there is no need to change nominal prices