The Linked Exchange Rate System was established in 1983. It is in essence a Currency Board system, which requires both the stock and the flow of the Monetary Base to be fully backed by foreign reserves. Any change in the size of the Monetary Base has to be fully matched by a corresponding change in the foreign reserves. In Hong Kong, the Monetary Base comprises the following components:

Certificates of Indebtedness (as backing for banknotes) and government-issued notes and coins;

the sum of balances of banks' clearing accounts (Aggregate Balance) maintained with the HKMA for the purpose of clearing and settling transactions between the banks themselves, and also between the banks and the HKMA; and

the outstanding amount of Exchange Fund Bills and Notes.