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Widening Trading Range of RMB Good and Bad for Hong Kong
The recent revelation by Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong to the Hong Kong media that the renminbi could be allowed to trade at a larger margin has prompted many to ask, "If the renminbi's trading margin was expanded, how would that affect Hong Kong?" Experts say that a wider band will have an equal amount of advantages and disadvantages for Hong Kong's economy.
Joseph Yam said, the volume of renminbi in circulation and the demand for it by banks will continue to increase in the future. This is expected to be a positive influence Hong Kong's overall economy and not have an adverse effect on the independence and stability of Hong Kong's currency system.
He said, devaluing the renminbi could actually have a stimulating effect on Hong Kong's economy because the positive effects created by the demands in the closely linked China and Hong Kong economies will be enough to offset the negative effects of a few "economic activities" in China and Hong Kong losing their competitiveness.
In reality, most of Hong Kong's manufacturing industry and production costs are on the mainland. Thus, if the renminbi is devalued, Hong Kong business' production costs will undoubtedly decrease, which will benefit exports. As for investments, the same amount of investments will be able to purchase more because the renminbi is devalued, which will benefit attracting new investments.
But the problem is, because the mainland enjoys a large trade surplus and its economy is recovering, the renminbi is strong. Thus, people are worried that if the renminbi's trading margin is expanded, the renminbi exchange rate could neither rise or fall. If this is the case, it would hurt Hong Kong's economy.
By the same rationale, if the renminbi appreciates, the thousands of Hong Kong factories located on the mainland would see their business costs rise, which would hurt exports. If the Hong Kong businesses receive smaller returns on their investments, the volume of foreign goods passing through Hong Kong could also decrease, which would hinder the recovery of Hong Kong's economy, which relies so much on exports. Hong Kong's imports of food products and daily necessities from the mainland would thus see a rise in prices.
A researcher at Bank of China Group said that people should not be concerned of the affects an appreciating renminbi would have. He said, if the renminbi appreciates, it will be a gradual process and give investors enough time to react. Also, an appreciating renminbi will give investors more confidence in the Hong Kong dollar, which is beneficial to the stability of the Hong Kong financial market.
Widening the trading range of the renminbi does not equal to making the renminbi freely convertible, but it is one step closer to making the renminbi freely convertible. Thus, Hong Kong should start preparing for it sooner than later.
Dai Xianglong, the governor of the People's Bank of China, has said that as the mainland's market mechanisms, banking systems, financial monitoring methods improve, China will move towards a freely convertible renminbi.
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