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15 January, 2002
RMB & HKD
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| (a) |
A RMB devaluation is very unlikely unless there is global currency turmoil of significant proportions. One should remember that the RMB remained stable when the Asian financial crisis created enormous uncertainties and pressures for China. |
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| (b) |
Even though the RMB has strengthened quite a lot vis-a-vis other Asian currencies in the past few years, China's exports remain globally very competitive, partly because of inflation and productivity growth rate differentials (in China's favour), and partly because of the way FDI flowed in recent years (which is a major driver for exports). |
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| (c) |
If the RMB had to devalue because of a significant global currency turmoil, I would not rule out the possibility that the HK government may as well use the opportunity to change the HKD currency regime. If the world were to be thrown into financial turmoil, anything is possible. |
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| (d) |
But if the RMB devalues mildly (say allowing the exchange rate to fluctuate within a broader band and in the process allow the RMB to weaken gradually) and slowly over time, I think the HK authorities would not change the HKD link to the USD. A weaker RMB will actually enhance the export competitiveness of Hong Kong's exporters and traders (as most of their products are produced or sourced in China). But of course, the market in the short term will put pressure on the HKD and there will be a period of volatility. |
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| (e) |
One should be aware that breaking a fixed exchange rate and allowing it to float is a highly complex and hugely challenging job. The economic, social and political price to pay is huge if the process is not handled smoothly. For a small economy like Hong Kong and where capital flow is totally free, this is going to be even more challenging. Allowing a currency to float also raises the question of what the new monetary policy anchor is. Clarity of monetary policy is important. But in the case of Hong Kong, little is known/debated within Hong Kong what the new monetary policy anchor should be (exchange rate stability against a basket of currencies? low inflation? monetary growth target?). Market confidence in the central bank authorities and the quality of the government leaders is also critical. |
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| (f) |
The economic challenge facing Hong Kong, as is increasingly understood by the business sector and the government, is how to continuously improve the economic value added of the SAR's activities. To a certain extent, the fixed exchange rate forces this upgrading process to happen faster, and of course in a more painful way. Those who argue Hong Kong should devaluate so as to gain competitive advantage (and I must say there are still a lot of people who believe this) are gradually losing ground. The rapid pace of development in China in recent years is convincing more and more people in Hong Kong that trying to defer the pain is just impossible. |
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| (g) |
"If it ain't broke, don't fix it" is therefore the most likely strategy for Hong Kong for the HKD exchange rate arrangement. The talk about the need to review the currency arrangement in the longer term does not mean that change is going to come anytime soon. |
K.C. Kwok
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| PBOC vows stable RMB policy |
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| Chinese central bank governor, Dai Xianlong, underscored his commitment to a stable RMB policy for 2002, helping address fears amongst some Asian central banks that the weakening yen may prompt a RMB devaluation. Dai also echoed the concerns of his Asian neighbours, calling on Japan to "maintain stability" in the yen for fear of a "domino effect" impact on Asian currencies. There are three implications: |
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It is a clear indication that Chinese FX policy in 2002 remains targeted at stability ahead of the leadership changeover in 2002/2003. Only recently had Malaysia's PM Mahathir raise concerns over the MYR not only because of the weak yen but what the impact of a weaker yen will have on the RMB. Increasingly it seems the real concern for Asia is not just a weak yen per se, but the more significant and perhaps more far reaching impact of a devalued RMB to Asian economies. Dai's vocal commitment to stability should help alleviate fears of a RMB devaluation even if USD/JPY does reach 140. |
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However, that does not mean we can rule out with certainty the possibility of a change to RMB policy this year. Governor Dai vowed to make progress towards capital account convertibility, leaving scope for some possible change in policy if conditions were right. Any move remains likely to be a widening in the RMB band but our view that the RMB would likely come under appreciation pressures (strong balance of payments position), rather than depreciation, remain. |
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Increasingly, China is showing improving leadership qualities in Asia, at the expense of Japan. While the structural difficulties facing Japan have eroded their economic influence, their seemingly lack of regard for the consequences of a weaker yen for Asia may start to diminish their political influence as well. China, on the other hand, has taken this opportunity with both hands. Not only have they tried to address the weak yen issue through dialogue but it has also attempted to offer assurances to the rest of Asia that, despite yen weakness and all the difficulties it causes, China will maintain a stable RMB, an assurance that will cheer many Asian central bankers at least for now. |
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| Mike Moran |
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This memorandum is issued by Standard Chartered Bank and is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Opinions expressed herein are subject to change without notice. This memorandum has been prepared solely for information purposes and for circulation and no responsibility is accepted for use of or reliance on information provided herein. This memorandum does not constitute any solicitation to buy or sell any instrument or to engage in any trading strategy. Standard Chartered Bank, or any company within the group of which it forms part, may have a position in any of the instruments or currencies mentioned.
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