Yuan looks likely to overtake HK dollar

By Zhang Jin and Lillian Liu (China Daily)
Updated: 2007-01-04 07:15

HONG KONG: People in this most affluent of Chinese cities may be in for a psychological blow. If economists are to be believed, the Hong Kong dollar is likely to be overtaken by the once humble yuan "within days", bringing to an end more than 15 years of its superior existence.

But the irony is that an appreciated yuan will do more good than harm to the people of Hong Kong.

Though 100 yuan ($12.5) fetched HK$99.6 at the end of 2006, experts say the order could be reversed in a few weeks. After all, 100 yuan fetched only HK$94 before its latest appreciation in July 2005.

The greenback or the RMB?

The possibility of an appreciated, flexible yuan has generated discussions over whether an increasingly mainland-centered Hong Kong economy should do away with its currency's peg to the greenback, and instead link it to the yuan.

Most of the economists interviewed by China Daily say that is not possible in next couple of years.

"The peg (to the US dollar) is working quite well," says the head of Citigroup (Asia Pacific) economic analysis team, Huang Yiping.

Others feel a fully convertible yuan should be the primary pre-condition for that. "I don't see this possibility before the yuan is fully convertible," Hang Seng Bank Chief Executive, Raymond Or, says.


In fact, money exchangers in Hong Kong and neighbouring Shenzhen are already charging retail customers more than one HK dollar for every yuan.

The central government's think- tank, the State Information Centre, sees the yuan appreciating by 3 to 4 percent against the weakening US dollar this year, thanks to the Chinese mainland's booming economy. Some foreign banks have forecast as much as a 10 percent increase.

It is just "a matter of time", says Sun Hung Kai Financial Group's strategist Castor Pang. A more valuable yuan could become a reality this month - one big reason for that being the HK dollar's peg to the greenback.

Generous spenders

The greatest beneficiaries of an appreciated yuan would probably be Hong Kong's retail and tourism sectors. A larger number of mainlanders will head to the city because they can get greater value for the yuan. That means they would spend more, Credit Suisse (Hong Kong) senior economist Tao Dong says.

From December 30 to January 1, a total of 145,757 mainlanders visited Hong Kong, according to Hong Kong's Immigration Department.

Mainlanders now comprise half of the tourists in Hong Kong who account for up to 8 percent of the city's economic activities.

"Shoppers have always been the greatest boon for a service-led economy like Hong Kong," says Bank of East Asia economist Paul Tang, citing history to prove his point.

Post-SARS, it was the influx of mainland tourists that helped Hong Kong recover from the economic downturn. And thanks to them to a large measure, the city has seen rapid growth after 2003 - the longest economic upswing cycle since 1997.

A lot of small Hong Kong retailers, who earlier were reluctant to accept yuan notes, have now joined their bigger counterparts to not only accept the mainland's currency, but also offer a 1:1 ratio.

"There's no reason to say no to the yuan now. It'll soon be more valuable than the HK dollar," says Sally Ng, a saleswoman in a 10 square-meter outlet in Hong Kong's food and shopping district of Wan Chai.

Market bullish

Hong Kong's retail and tourism sectors will not be the only ones to share the spoils of an appreciated yuan. Its stock market, too, stands to benefit. The world's seventh largest bourse, along with its ancillary sectors, generates almost 70 percent of the city's GDP.

Seeing Hong Kong as a proxy to gain from the yuan's appreciation and the Chinese mainland's robust economy, more international investors will flood into the city to buy H-shares, or Hong Kong-listed mainland companies. After all, 2006 gave them more than they expected.

The "hot money" did not recede even during the Christmas holidays, when investors across the world normally pull back to prepare for the next year.

Instead, between Christmas and New Year, hot money drove the benchmark Hang Seng index (HSI) to climb above the psychological barrier of 20,000 points.

December 28 saw the HSI reach an all-time high of 20,001.91, reflecting a year-on-year rise of more than 34 percent.

H-shares did an even better job in 2006. They surged 94 percent to peak at 10,455 on December 28.

"Hong Kong has never been short of liquidity after the yuan rose in the second half of 2005," says Tung Tai Securities' Tung Sing-hing.

Twelve Hong Kong economists surveyed by China Daily went even a step further. If the yuan appreciates again in 2007, it could push up the HSI to maybe 21,700 points (the average of their separate forecasts).

Higher inflation not likely

Allaying fears that a stronger yuan would accelerate inflation in the Chinese mainland's neighbouring markets, the economists say that Hong Kong residents' daily expenses would not increase much because of a possible rise in the prices of imported products.

As a service-based economy with little agriculture or manufacturing units, Hong Kong imports many essential goods, including eggs, vegetables, meat and fish, from the Chinese mainland, hence the fear that a stronger yuan would make things costlier.

But compared to the spiralling housing costs that account for 30 percent of the consumer price index (CPI) in one of the world's most expensive cities, the rise in prices of essentials and daily use products could at most be "mild", says Tang.

(China Daily 01/04/2007 page3)

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