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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
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dynamic region in the
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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.
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