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The renminbi and the Hong Kong dollar The appreciation in the renminbi will not affect Hong Kong’s Linked Exchange Rate system. About two months ago I wrote in this column that there was a 50-50 chance that the renminbi exchange rate against the US dollar would reach 7.80, or parity with the Hong Kong dollar, within six months. I even suggested that some of you might like to take a bet – just for fun of course – on exactly when this would happen. On 27 November the renminbi entered the Convertibility Zone of the Hong Kong dollar under the Linked Exchange Rate system, and reached 7.8394 on 29 November. It looks as if those of you who bet on an earlier date may soon be set to collect. In fact, judging by recent anecdotal reports in the press, some shopkeepers and taxi drivers in Shenzhen have already decided that the renminbi and Hong Kong dollar have reached parity, and are declining to accept payment in Hong Kong dollars at one to one, which they had been doing for a long time. Wherever two or more currencies that are not formally linked to each other circulate together, especially close to a border with a lot of cross-border trade, it is common and natural for there to be shifts in the use of those currencies for personal consumption. Which of the currencies is favoured depends on a range of factors including the exchange rate, whether there are differences in convertibility, and, perhaps most important, the preferences of the people doing the spending. Those of you who have spent time in the areas near the border of Canada and the US, and anyone who lived in Europe before the introduction of the euro, will be familiar with this. Indeed, the phenomenon is not unknown in Hong Kong, as our early monetary history shows: even within recent memory, the renminbi and Hong Kong dollar actually reached parity as short a time ago as 1992, although at that time cross-border spending habits and the monetary arrangements on the Mainland were somewhat different. But, however natural this sort of fluctuation may be, it is also natural, as I suggested in this column a few months ago, for Hong Kong residents travelling on the Mainland to experience a bit of a jolt when they find that HK$100, which used to buy more than RMB100 yuan, now buy the same amount or even a bit less. It is of course undeniable that travelling and shopping on the Mainland are going to cost a little more in future. But when we think about it carefully it should be clear that these changes in the renminbi exchange rate arise naturally out of the development of the Mainland economy. It would actually be surprising if the currency of a rapidly growing economy like the Mainland did not appreciate over time. Where two economies like those of Hong Kong and the Mainland, one already developed and the other developing rapidly, become more integrated, it is also to be expected that there should be some degree of price convergence between the two. Such convergence can take place through changes in prices or in the exchange rate of the two currencies: in practice we are likely to see both, even if it is the exchange rate adjustment that is attracting attention just now. We should also remember that, while the cost of trips to the Mainland may rise and there may be some inflationary effect on the prices of goods imported from the Mainland, although this is likely to be limited, there are also likely to be some beneficial effects on the Hong Kong economy. If the cost of our visits to the Mainland increases, then the opposite must be true for visitors to Hong Kong from the Mainland and other countries whose currencies are also appreciating against the US dollar, and this will benefit the tourism and retail sectors here. There will also be positive effects on the services sector and on Hong Kong’s general competitiveness. One thing that will not be affected is our monetary policy. Readers will have noticed that the recent movements in the renminbi exchange rate have had no effect on the exchange rate of the Hong Kong dollar. It is clear that our Currency Board system is functioning effectively. Of course we cannot rule out the possibility that there may be some psychological effect on the markets as the renminbi exchange rate reaches 7.80, and we will be keeping a close watch on developments. But it is quite clear to me that market participants well understand that the Hong Kong Government remains committed to the Linked Exchange Rate system and that there is no logical reason why appreciation in the renminbi exchange rate should lead to any change.
Joseph Yam
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