Recently John Tsang, Financial secretary of hong kong has announced that “We are now the world’s largest offshore renminbi business centre, as well as the largest renminbi bond market outside the Mainland. As economic and trade ties between the Mainland and the Belt & Road economies grow stronger, the renminbi will become even more widely used worldwide. ” ¬†Following the internationalisation of the RMB, there has been many debates on whether or not the HKD should be reformed to peg to RMB instead of the USD. As the RMB is moving toward becoming a convertible and free floating currency, Hong Kong must consider what to do with the Peg once that is achieved.The current link requires Hong Kong to follow the US monetary policy and made Hong Kong’s monetary policy limted to achieve price stability and economic growth. The current exchange rate system has served the economy well, but local residents have to cope with periods of contracting wages and falling property prices, and also periods of rapid inflation. These price and pay swings happen because Hong Kong imports US monetary policy via the peg, even though the US and Hong Kong economies may not have the same economic cycle.RMB is the best alternative solution as it is not suitable for Hong Kong to adopt floating exchange rate system because it would be better for Hong Kong as an international financial centre and trade dependent economy to have a reserve currency. Having a reserve currency would not only attract foreign investors, it would also help balance the current, financial and capital accounts. Whenever there is large inflows and outflows of goods/service and securities in Hong Kong, it will not only make the exchange rate become more volatile, but also make the financial market becomes more volatile. Having too much exports will cause appreciation, thus lowering aggregate demand in goods and services of the economy, ceteris paribus. Having a fixed exchange rate in this case will prevent the change of trades elastic demand. Studies shows, while the Hong Kong’s financial and economic links are increasingly dominated by mainland China, and previous concerns about the openness of China’s capital account are slowly receding, if China continues to open its capital account, the world reserve currency could shift from United States dollar to renminbi.A poll conducted last year by the London Business School and Hong Kong University for business executives in South East Asia, 62 per cent reckoned the Hong Kong dollar would simply be phased out eventually, as the renminbi internationalised.A popular argument states that after the RMB becomes convertible and free floating, Hong Kong should somehow link the HKD to RMB due to further economic and financial integration. By then, China will become the most influential force to our economy and dominate our economic cycle, replacing the US. This integration would also benefit Hong Kong politically and ease up the recent tension.Therefore, the HKD should peg to the RMB instead of the USD, or peg to a basket of currencies dominated by the RMB, or Hong Kong should simply replace the HKD with the RMB.Anti-RMB debateAlthough a change in the linked exchange rate seems to be beneficial to Hong Kong economy, every monetary system has its own advantages and disadvantages with no exception to the current linked exchange rate system.Even with the recent changes and damages to the Hong Kong dollar due to US policy changes: 1.)Hong Kong is a financial center and any major change in the currency may cause an economic fluctuation. This is evident in the recent indian rupee scraps on November of 2016. The prime minister of india had announced that the 500 and 1000 rupee banknotes will be demonetized (withdrawn from the financial system) overnight. The supply shock of the currency caused major damages to domestic factors, many who earn wages daily and small traders who only use cash, lost income due to the absence of liquid cash. It would also impact the consumption, as the drop of supply means the appreciation of the currency, people will hold onto the currency hoping that it would continue to rise, will result in a drop in consumption. Which in a long run would slow down the economy.A similar situation happened in the late 1990’s of Zimbabwe economy, an event where drove its economy to the ground. Where they confiscation of private farms from landowners, towards the end of Second Congo War causing a withdrawals from foreign investors and hyperinflation in the Zimbabwe economy. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe’s hyperinflation because the government of Zimbabwe stopped filing official inflation statistics. However, Zimbabwe’s peak month of inflation is estimated at 79.6 billion percent in mid-November 2008. Recent article of 2017 revealed that Zimbabwe has reached 95% unemployment rate and GDP of $600-$700 USD per capita.Although a change of the exchange system won’t be as damaging as the rupee change or the zimbabwe political change, as it is not a liquidity shock, it will still cause a welfare loss on those who are holding the currency. If a change in the linked exchange system is announced, it will suffer a belief of change in volatility from speculators. (Volatility is a measure of risk of a security) Those who hold HKD due to its stability will lose confidence on the HKD may start to remove it from their portfolio resulting in a depreciation and inflation of the currency. Depreciation of a currency will lead to a surplus of trade as goods of Hong Kong would be cheaper, but Hong Kong BoP is already on a surplus, if HKD depreciates any further, it would only push the BoP further from balancing. Those who mainly hold HKD, the people of Hong Kong, will suffer the most from inflation and the lost of confidence on the economy in a whole. 2.)The linked exchange of HKD to USD allows more freedom in terms international trade, chinese market policies might not be appropriate for the Hong Kong market.The USD is the most traded currency in the world, this is because the US market is considered the largest and most reliable in the world. The US market is considered the largest open market that without protectionism,international commodities such as gold and petroleum (petrodollar) are standardly priced in USD, thus it is used as the current universal reserve currency.A direct linked exchange had allowed Hong Kong dollar to be also considered a universal currency, thus had allowed the Hong Kong market to soared in growth within the recent decade. Under the linked exchange rate, foreign investors had heavily invested in the Hong kong economy as exchange rate risks are removed. The exchange rate has been stable even through political and financial turmoils and had made Hong Kong into the home of “asia’s financial center” today.As RMB is merely entering the state of a free floating currency, a change in the linked exchange system, impacts would be rather difficult to predict thus losing consumer confidence. A change without proper trust and confidence will cause major chaos on Hong Kong markets. Speaking of which, the RMB lacks the reputation that the USD has, it has a history of currency manipulation and fluctuation. Articles had state that in 2015, the chinese government has forcefully devalue its own currency to improve its own trade. (A depreciation of the currency means that exports would be cheaper, but an increase in trades means a trade surplus, thus a higher demand for the currency making a stronger.A stronger currency means it is more expensive to purchase goods, which in turn will be replaced by weaker cheaper currency as they are more advantages in trade.) The act of currency manipulation means that china does not suffer the consequences of a strong currency, by buying massive amounts of foreign currency. It is the currency equivalent of dumping (export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market.) which had made manufacture competitors lose jobs.A manipulative currency like such would lose the confidence of investors, thus a linked exchange rate would be disadvantageous


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