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.
In fact, money exchangers in
Hong Kong and neighbouring Shenzhen are already charging retail customers more
than one HK dollar for every yuan.
The greenback or the
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,
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
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.
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
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
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.
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
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",
(China Daily 01/04/2007 page3)