What role can RMB inflow play in HK?

Updated: 2013-01-22 05:39

By Kui-Wai Li(HK Edition)

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At an international finance conference in Hong Kong on Jan 14, Chief Executive Leung Chun-ying announced the establishment of a new institution focusing on the financial industry's development in Hong Kong. At the same time, a senior mainland official disclosed that Beijing will allow more funds to come to Hong Kong through qualified domestic and foreign business and individual schemes.

While Hong Kong has a number of institutions that regulate the SAR's monetary and financial affairs, a newly established financial development body aims to consider the advantages of both Hong Kong and the mainland when there is greater inflow of RMB into Hong Kong. Similarly, Beijing wants to have a gradual transition of RMB into a world currency, and Hong Kong will play a major role in that process.

The idea of allowing mainland businesses and individuals to invest in Hong Kong in the form of domestic qualified investment schemes has been under discussion since 2006. The discussions continued to boost the Hong Kong stock market until the schemes were shelved by Premier Wen Jiabao in November 2007, amid fears of financial bubble in Hong Kong, creating an outflow of RMB that would be difficult to control. Retrospectively, the decision to shelve these investment schemes was correct as the country experienced a severe snow storm and an earthquake in the spring of 2008.

While officially the RMB is still not a fully convertible currency, its inflow to Hong Kong is already almost unrestricted as the city is an RMB offshore center. Effectively, there is no convertibility problem between RMB and HK dollar. Together with the increasing visa-free travel of mainland residents to Hong Kong, the inflow of RMB has been large, and will become massive when there are more investment schemes.

These domestic qualified mainland investment schemes will create "one-way" traffic in RMB inflow to Hong Kong. It has become popular for mainland travelers to come to shop in Hong Kong, especially in brand name merchandise and luxury items, thereby boosting retail business. The "cash rich" mainland residents have come to Hong Kong to shop for properties, stocks as well as other investable assets.

While retail businesses are counting the profits gained from the large and continued inflow of visa-free travelers and the financial sector anticipates a rise in securities investments resulting from the massive inflow of RMB, there are continued social grievances regarding the rising rents and sky-rocketing property prices. The more worrisome aspect is the extent of speculation in the stock market, as it is difficult to draw a line between investment and speculation in both the securities market and the real estate market.

It is expected that these two markets will rise rapidly. The Hong Kong stock market could reach 30,000 points, while properties in Hong Kong will possibly experience a double-digit increase in price this year. Speculations are like the "musical chairs" game, as those who have assets that changed hands would gain in the process of investment transactions; the only loser would be the person holding the asset when the "music" stops as the property bubble bursts and price of asset falls. In addition, the rising property price will definitely spill over to price increases in other commodities, thereby deepening inflation in Hong Kong.

The expansion in the financial sector may not quickly generate equivalent economic benefits to other sectors, and the rapid rise of property price would deepen the pressure on housing provision in Hong Kong. The resulting inflation would make the city less competitive. Meanwhile, there are surely other reasons in addition to transforming the RMB into an international currency. For example, by holding assets here, mainland residents have effectively turned their "cash" into "wealth" as assets are legally better protected in Hong Kong. Equally, the inflow to Hong Kong is the outflow from mainland, which could not be kept and used to aid economic growth in the mainland economy.

It has been popular to argue that the Hong Kong economy is being "marginalized" as the fall in Hong Kong's competitiveness coexists with the rise in competitiveness in Shanghai, Shenzhen, or even Qianhai. People holding such a view have only considered the "absolute disadvantage" when Hong Kong is compared to the economic resources in the Chinese mainland. Hong Kong, however, always boosts its "comparative advantages" when compared to the mainland economy: we are best in some areas, but are expected to excel in all areas.

How can the RMB inflow aid Hong Kong economy? How about encouraging mainland investments to engage in industrial production here? This may be costly, but those costs would be minimized considering the large market size of the country. Mainland residents have come to shop for brand name products and buy luxurious properties. It would be appropriate next for mainland investors to come to establish industries that produce goods geared for the mainland market.

The author is an associate professor in the Department of Economics and Finance at City University of Hong Kong.

(HK Edition 01/22/2013 page4)