What future for Hong Kong: dollar or renminbi?
The dollar is still the currency through which most financial and commercial transactions are conducted, however a peg to the Chinese currency appears more reasonable to analysts. Be aware of related political developments.
The peg between the Hong Kong dollar and the US dollar has been in place since 1983. On October 17, 1983, the currency was pegged at a rate of HKD 7,8 per USD 1; since May 18, 2005, the currency has fluctuated between 7,75 and 7,85 HKD per USD. According to the Hong Kong Monetary Authority (HKMA), the system provides a constant monetary peg which reduces the risk faced by international importers, exporters and investors. This was very important for a small but very open economy like that of the country, which represents both a hub for trade to and from China and one of the main centers for global financial exchanges. The dollar is, in fact, the currency through which most financial and commercial transactions are conducted.
The peg between the Hong Kong dollar and the US dollar has withstood many attacks over the past 32 years, most of which occurred during the 1997 Asian crisis, but which the local government has always vigorously rejected. The potential risks associated with the exchange rate are not new to Hong Kong: the prices of property, goods and services (including salaries) are very flexible, both in terms of increases and cuts. Furthermore, the authorities conduct prudent fiscal policy, the risky banking sector is minimized and, at the same time, a huge foreign exchange reserve is built up to support the exchange rate and monetary base. The current exchange rate system has served the country's economy very well, but residents face periods of falling wages and falling property prices, as well as periods of rapid inflation. These price and payment swings are being fueled by the Fed's monetary stimulus: so are there any risks to maintaining the peg given recent developments?
In August 2015 the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the renminbi, exceeding 3% discount of its value, after ten years in which the Chinese currency had appreciated by 33% against the dollar. The move was unexpected and seen by many analysts as a desperate attempt by China to boost exports. However, the PBOC said the devaluation was just one part of the reforms directed towards a market-oriented economy. Initially the speculation had focused on a consequent devaluation of the Hong Kong dollar: however, in the following days the fluctuations settled down as it became clear that China did not expect further steps.
Against this backdrop, an important factor calling into question the US dollar peg is Hong Kong's growing integration with China. If in the past most exchanges and transactions were carried out in dollars, now that trade with the Chinese counterpart is growing and the renminbi is gradually playing a more important role locally, a peg with the Chinese currency appears to analysts more reasonable. Another reason for a renminbi peg is related political developments. Relations between Beijing and the population of Hong Kong have been under pressure for some time, even resulting in violent protests: hence a hypothetical peg of the Hong Kong currency with the renminbi would represent a real showdown against the local population. This political argument, however, would only become realistic if China made its currency fully convertible.
But what would be the influence to do business in Hong Kong? A change along these lines is not expected to have very large effects on businesses. According to Atradius, the competitiveness of the local market would not be affected, with the only difference being that the added security resulting from a renminbi peg would benefit Hong Kong businesses more than with the US dollar.
