|HONG KONG: RETURNING TO THE FOLD|
January 10, 1997
Return to the Hong Kong forum's top page.
in this forum:
What will happen to religious freedom in Hong Kong after the transfer ? Are the restrictions on China enforceable? What will life be like in Hong Kong in the year 2000? What's the prognosis for the future of the independent media in Hong Kong? How will the recording of economic data change? What will be China's attitude towards the Eurocurrency market ? Has China made any specific commitment to hold free elections to parliament after the transition? What will the U.N. do if it refuses? Viewer comments
Online NewsHour Links
December 17, 1996: As the Chinese defense minister tours the U.S., the NewsHour looks at human rights abuses in China.
November 21, 1996: A NewsHour report on the Asia Pacific Economic Cooperation and Asia's economy, the fastest growing, most dynamic region in the world. .
The NewsHour Asia Index.
Michael Porter of San Francisco, CA, asks:
currently Hong Kong's currency is the Hong Kong dollar which is tied to the U.S. dollar, and China's is the Yuan. When China takes over Hong Kong will it phase out the HK dollar and replace it with the Yuan? If so what effect will this have upon the international community within Hong Kong?
Dr. DeGolyer reponds:
Milton Friedman expects that to happen sometime within 10 years of the handover. Two currencies in one country seldom work well,especially if both are fully convertible but one is supposedly linked in value and the other floats. As you know, China is already introducing limited convertability of the Yuan and has pledged to go to full convertability very soon. The HK-US dollar link provokes passionate statements of undying and eternal fealty from Hong Kong officials, and they have an enormous fiscal reserve pledged in its defence, and China has also vowed to protect the link. However, no amount of reserves can really protect against the enormous flows in the currency markets nowadays and one really wonders how the leaders in Beijing will explain to the 700 million poor peasants in China that they lost several billion dollars protecting the currency of hyper-wealthy Hong Kong.
One also fails to see how Hong Kong could remain isolated from currency scares when the next Taiwan-PRC head to head dispute occurs, and if China is involved protecting its own currency in such a case Hong Kong's ability to call on China for assistance must be doubted. Even the regional repurchase agreements among a number of the Asian national banks would have to have a hard time holding against international speculation and panic in such circumstances.
Economists also debate just how healthy the link has been for Hong Kong, especially once it served its political purpose of restoring confidence in Hong Kong in the mid-1980s and saw it through the troubles in 1989. There has been some cost in competitiveness due to differential rates of inflation in Hong Kong and the U.S. The difficulty in changing the current regime is that changing it itself could provoke a crisis as people question the reasons for authorities actions. Since suspicion of China still dominates many people in Hong Kong and even pro-Beijing business people like Li Ka-shing have moved much of their wealth out of Hong Kong, messing with the currency is likely to only come in the case of traumatic circumstances. Unfortunately, China is making changes to its own currency and to Hong Kong's relations to itself and therefore to the rest of the world the effects of which which certainly are just about impossible to predict. Changing the link, either to the Yuan or the Yen or any other currency or basket of currencies should take place only after political uncertainties abate and during a time of financial and currency stability. However, it is precisely at those times that most people simply prefer to leave well enough alone.
As far as effects on the international community, since most aren't U.S. citizens, their own currencies already float against the Hong Kong-US dollar.