Rising Yuan: Implications to Hong Kong

Although the discussion over currency rate between China and US has become a heated debate, it is not my interest, nor have I the knowledge to evaluate the macro economic consequences should China allow its currency to appreciate. However, in the light of this, I thought we would take a step back and look at some of the implications of a rising Yuan to Hong Kong. In the simplest sense, since Hong Kong dollar is pegged to the green, a rising yuan would translate to a slight devaluation of the Hong Kong dollar. Put it in the context of daily lives, what does that mean? For exporters/manufacturers (is there any left?!) of Hong Kong, that would be a good news because their products appear to be cheaper now to mainland purchasers and the revenue they earn in Yuan would convert into a higher net income. However, for most residents of Hong Kong, the negative impact probably outweighs the positive ones because Hong Kong imports almost all of its resources from outside, food for one, mostly comes from the mainland. The cost of food is bound to rise with a rising yuan. Moreover, there has also been a lot of concern as of late over the large influx of cheap money from the mainland into the Hong Kong real estate market, thereby driving up properties' prices. A rising yuan would also mean a discounted value of Hong Kong properties in the eyes of the mainland investors, and it is possible that more money will be poured into the market and price will be ever higher. All of this will constitute to post a serious inflation risk in Hong Kong.

It is not within the ability of the current troubled Hong Kong government to re-evaluate the currency peg consider that the underlying economic and social consequences of unpegging will be enormous. With the yuan stronger and more accepted in the world, we should nevertheless consider the possibility of currency integration between China and Hong Kong, and in the least, analyze the cost of upholding the currency peg with United States Dollars.