Download Analysis on the Status Quo of RMB-ization in Hong Kong... Economic Impact

Analysis on the Status Quo of RMB-ization in Hong Kong and Its
Economic Impact
YIN Yahong
Department of Finance, Guangdong University of Finance, Guangzhou, Guangdong, P. R. China,
510521
[email protected]
Abstract: With the further development of economic relationship between Mainland and Hong Kong,
and the operation of personal RMB business of bank in Hong Kong, the circulating scale of RMB is
becoming more and more in Hong Kong. As a result, the phenomenon of RMB-ization that RMB
substitutes for Hong Kong dollar is increasingly serious. As a double-edged sword, this phenomenon has
not only positive but also negative effects on economic development of Mainland and Hong Kong. This
paper analyzes these effects of RMB-ization based on the status quo of RMB-ization in Hong Kong and
puts forward the corresponding countermeasures.
Keywords: RMB-ization, Currency Substitution, Economic Impact
1 Introduction
With the advancement of opening to outside of China and the enhancement of RMB international
position, the circulating scope of RMB is unceasingly expanding, such as Hong Kong SAR, Burma,
Thailand, Vietnam, Mongolia, North Korea, etc. RMB has already gradually substituted for local
currency to a certain extent, namely RMB substituted for other currencies in medium of exchange,
accounting unit, and value stores so that the phenomenon of RMB-ization appeared.
The relationship of trade between Hong Kong and Mainland has been very close all the time. Since
CEPA was subscribed in 2003 and personal banking business of Renminbi was operated in 2004, the
relationship of trade between Hong Kong and Mainland has further developed. With the frequent contact
between Hong Kong and Mainland, RMB has already become “the second currency” in Hong Kong. As
a result, the phenomenon of RMB-ization that RMB substitutes for HKD is increasingly serious in Hong
Kong. As a double-edged sword, this phenomenon has not only positive but also negative effects on
economic development of Mainland and Hong Kong.
Therefore, deep researching the impact of RMB-ization in Hong Kong has the vital practical
significance not only to perfect exchange rate mechanism of RMB, realize completely free convertibility
of RMB, but also to impel the regionalization of RMB. This paper analyzes these effects of
RMB-ization based on the status quo of RMB-ization in Hong Kong and puts forward the corresponding
countermeasures.
2 The Status Quo of RMB-ization in Hong Kong
There is a large literature on estimations of the amount of RMB circulating in Hong Kong. Zhang Lijuan
and Sun Chunguang (2002) thought that there were approximately RMB 60 billion yuan cash circulating
in Hong Kong through on-the-spot investigation in 2001. Xu Hongshui (2004) estimated that the amount
of RMB circulating in Hong Kong exceeded RMB 70 billion yuan. Xu Qiyuan and Liu Lizhen (2006)
estimated that the M1 in RMB circulating in Hong Kong increased to 60 billion HK dollars in 2005 from
about 20 billion HK dollars in 2002 by the econometric model. Yin Yahong (2009) reckoned that RMB
cash circulating in Hong Kong increased to RMB 234.735 billion yuan in 2006 from RMB 20.178
billion yuan in 1998 using the model of demand for currency.
Since personal banking business of RMB was operated in 2004, the amount of RMB circulating in Hong
Kong has rapidly expanded, as shown in figure 1. Total demand and savings deposits and total time
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deposits increased to RMB 156.325 billion yuan and RMB 75.595 billion yuan in the second quarter of
2008 from RMB 2.799 billion yuan and RMB 2.489 billion yuan in the first quarter of 2004 respectively.
Total deposits increased to RMB 231.92 billion yuan in the second quarter of 2008 from RMB 5.288
billion yuan in the first quarter of 2004. Hereafter, the amount of RMB deposits of Hong Kong started to
decline due to the influence of global financial crisis.
Up to May 2009, there were 40 licensed banks engaged in RMB business in Hong Kong. They basically
contained all banks in Hong Kong who were engaged in retail business. During May 2009, RMB 911
million yuan was converted into Hong Kong dollars and other currencies, and an equivalent of RMB
1,674 million yuan of Hong Kong dollars and other currencies was converted into RMB through licensed
banks engaged in RMB business. There were 6,259 RMB remittance transactions from Hong Kong to
Mainland, amounting to RMB 417 million yuan. At the end of May 2009, 1,055,948 RMB demand and
savings deposit accounts and 134,786 RMB time deposit accounts were opened with licensed banks
engaged in RMB business.
250000
200000
Demand and savings deposits
150000
Time deposits
100000
50000
Total deposits
20
04
Q1
20
04
Q
3
20
05
Q
1
20
05
Q
3
20
06
Q
1
20
06
Q3
20
07
Q
1
20
07
Q3
20
08
Q
1
20
08
Q
3
0
Figure 1 RMB Deposits in Hong Kong, 2004:Q1-2008:Q4
Notes: Monetary unit of deposit is RMB million yuan. The first quarter of 2004 exclude the data of Jan. 2004 because
licensed banks started to offer RMB deposit taking, currency exchange and remittances services on 25 Feb. 2004.
Source: HKMA Monthly Statistical Bulletin, Issue NO.179, July 2009.
3 The Positive Effects of RMB-ization in Hong Kong
3.1 Achieving mutual benefit, which are advantageous to not only impelling the development of
tourism in Hong Kong and leading the economy of Hong Kong toward prosperity but also
developing the economy of Mainland
In the situation that RMB can not completely free convertibility, it is possible for Mainland resident to
travel to Hong Kong because RMB–ization makes Mainland resident not need to exchange foreign
currency. It greatly improves the enthusiasm of Mainland resident who travel to Hong Kong and facilitate
personnel intercourse between Mainland and Hong Kong. Thus, it promotes traveling expenditure in Hong
Kong and leads the economy of Hong Kong toward prosperity. The consumption expenditure of Mainland
visitors in Hong Kong in the recent year is shown in table 1.
From table1 we can find that the consumption expenditure of Mainland visitors in Hong Kong has
increased year by year since 1998. It amounted to 49.226 billion HK dollars in 2006, which increased by
2.36 times from 1998 to 2006. Percentage of the consumption expenditure of Mainland visitors accounting
for that of all countries’ visitors in Hong Kong also increased year by year, namely, increased to 69.56% in
2006 from 26.04% in 1998. Although the ratio declined in 2003 due to SARS, it still greatly rose due to
the payment convenience of RMB after 2004.
Like that, when Hong Kong resident hold the large amount of RMB, they can spend RMB cash on
purchasing the commodity or service of Mainland due to licensed banks of Hong Kong not engaged in
，
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lending business. Therefore, it is advantageous for Hong Kong resident to entering Mainland to expend so
as to drive the development of Mainland economy.
Table 1 Consumption Expenditure of Mainland Visitors in Hong Kong (1998-2006)
Consumption expenditure of Mainland
Percentage of the consumption expenditure of
visitors in Hong Kong (million HKD)
Mainland visitors accounting for that of all
countries’ visitors in Hong Kong (%)
1998
14660
26.04
1999
14012
25.82
2000
14454
33.23
2001
17433
39.66
2002
28772
55.65
2003
33378
51.26
2004
38583
57.80
2005
42197
62.36
2006
49226
69.56
Source: The corresponding data figured out from Oct. 2001 to Feb. 2008 of HK Monthly Digest of Statistics.
Year
3.2 Bringing about considerable international seigniorage and inflation tax for Mainland
RMB-ization can bring about considerable international seigniorage and inflation tax for Mainland so as
to increase government revenue. According to the amount of RMB cash estimated in Hong Kong①, we can
figure out the international seigniorage and inflation tax which RMB-ization bring about for Mainland, as
shown in table 2.
From the table 2, we can find that the international seigniorage and inflation tax of RMB-ization took on a
rising trend. The international seigniorage increased to RMB 23,473.53 million yuan in 2006 from RMB
2,017.764 million yuan in 1998. It increased by 10.63 times. As for international inflation tax of
RMB-ization, it relates to inflation rate of Mainland. From the beginning of 2000, the international
inflation tax of RMB-ization continuously increased with rise in the inflation rate of Mainland (except
2002).
At present, although the international seigniorage and inflation tax which RMB-ization bringing about for
Mainland are not very big, with the enhancement of RMB-ization in Hong Kong, they should be
considerable in the future.
Table 2 international seigniorage and inflation tax of RMB-ization(1998-2006) RMB million yuan
Year
RMB cash estimated in
International
International inflation tax
Inflation rate π
Hong Kong
seigniorage
1998
20177.64
2017.764
-0.00775
-157.598
1999
50680.14
5068.014
-0.0145
-745.674
2000
84777.59
8477.759
0.00325
274.6364
2001
122415
12241.5
0.00725
881.1206
2002
154555.2
15455.52
-0.00725
-1128.71
2003
169624.1
16962.41
0.01125
1887.042
2004
186568.1
18656.81
0.03775
6786.746
2005
204526.6
20452.66
0.018
3616.384
2006
234735.3
23473.53
0.01475
3412.018
Notes: International seigniorage equals RMB cash estimated in Hong Kong multiplies net yield RMB obtaining②.
International inflation tax equals RMB cash estimated in Hong Kong multiplies π / (1+ π ).
Source: π obtains from EIU-country data.
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3.3 Reducing even eliminating the transaction cost and exchange rate risk between Mainland and
① Yin Yahong. Estimation of the Scale of RMB Cash Circulating in Hong Kong:1998-2006. Economic Review,
2009,2: 37 42 (in Chinese)
② Net yield of RMB equal average yield RMB obtaining subtracts average interest rate and issue cost of RMB.
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Hong Kong so as to promote the development of bilateral trade and investment
The transaction cost caused by international transaction, offshore investment, and so on is enormous. J.
Frankel (1996) pointed out that the expenditure on foreign exchange of the whole world approximately
accounted for 6.5% of the global volume of trade through empirical analysis. In recent years, the
economical intercourse between Mainland and Hong Kong is increasingly close. Therefore, total foreign
exchange of the economical intercourse unceasingly enlarges and the transaction cost of foreign exchange
also unceasingly increases, as shown in table 3. From table 3, we can find that the transaction cost of
foreign exchange was 2017.764 RMB million yuan in 1994 while it increased to 13239 RMB million yuan
in 2008, which increased by 5.08 times. Transaction cost accounting for GDP of Hong Kong also
unceasingly increased, namely, increased to 6.1% in 2008 from 2.2 % in 1994. Transaction cost
accounting for the sum of GDP both Hong Kong and Mainland increased to 2.02% in 2008 from 1.5% in
1994.
After RMB-ization, the economical intercourse between Mainland and Hong Kong can directly pay in
RMB so that the high transaction cost of foreign exchange is saved. It should be of help to developing
bilateral trade. In addition, RMB-ization can reduce even eliminate exchange rate risk between Mainland
and Hong Kong to a great extent. It should be of help to mitigating the exchange cost of enterprises and
controlling the risk of exchange rate change. Thus, the economical intercourse between Mainland and
Hong Kong can be further expanded and the mutual development of economy can be promoted.
Table 3 The Transaction Cost of Foreign Exchange between Mainland and Hong Kong (1994-2008)
Transaction cost accounting for
Year
Volume of trade
Transaction cost
Transaction cost
accounting for GDP of the sum of GDP both Hong
$ million
$ million
Kong and Mainland %
Hong Kong %
1994
41803
2177
2.2
1.5
1995
44574
2897
2.2
1.4
1996
40733
2648
1.8
1.2
1997
50773
3300
2.2
1.3
1998
45412
2952
2.04
1.2
1999
43755
2844
1.9
1.1
2000
53947
3507
2.04
1.2
2001
55970
3638
2.09
1.2
2002
69189
4497
2.44
1.4
2003
87393
5681
3.0
1.6
2004
112665
7323
3.5
1.8
2005
136698
8885
3.8
1.9
2006
166089
10796
5.7
2.36
2007
197224
12821
6.2
2.38
2008
203670
13239
6.1
2.02
Notes: Transaction cost equals volume of trade between Mainland and Hong Kong multiplies 6.5%.
Source: The corresponding data figured out from China statistical yearbook.
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3.4 Promoting Chinese banking positively participating in the competition of international market,
being advantageous to exalting international status of RMB, impelling further free convertibility of
RMB and promoting the regionalization of RMB
Although RMB does not become international currency, the great amount of RMB circulating in Hong
Kong should cause a number of international trade and investment taking RMB as vehicle currency.
Chinese banking and other financial institution have evidently congenital superiority in these international
transactions. Thus, it should strengthen the competitive power of financial industry and impel financial
industry’s internationalization.
At the same time, RMB circulating in Hong Kong improves the status of RMB in Hong Kong. Hong
Kong taken as the global international financial center can engender radiation effect and further magnify
the influence of RMB. As a result, it should be of help to RMB stepping up free convertibility and
promoting the regionalization of RMB.
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3.5 Being advantageous to the further development of banking and impelling Hong Kong to become
RMB offshore financial center
Although Hong Kong has not become the offshore financial center of RMB, financial institution of Hong
Kong has been early engaged in RMB business in part. Especially, since personal banking business of
RMB was operated in 2004, the amount of RMB circulating in Hong Kong has rapidly expanded, as
shown in figure 1. Licensed bank of Hong Kong engaged in RMB business is able to increase the profit of
financial service. For example, city bank once forecasted that operating RMB business should increase
126 RMB million yuan for banks of Hong Kong every year. Therefore, RMB circulating in Hong Kong is
advantageous to the further development of banking of Hong Kong. Moreover, because any currency must
seek for opportunity for increment, it is possible for banks of Hong Kong to operate the credit business of
RMB after the amount of RMB in Hong Kong runs up to a certain extent. Once banks of Hong Kong
operate the credit business of RMB, Hong Kong will profit. It will greatly promote the status of Hong
Kong taken as international trade and finance center, which becomes the collection and distribution center
of RMB to circulation in Asian countries. As a result, it should advantageous to Hong Kong becoming
RMB offshore financial center.
4 The Negative Effects of RMB-ization in Hong Kong
4.1 Having impact on financial market of Mainland
When foreign exchange control has not been relaxed, it is difficult for oversea speculator to attack RMB
because they lack enough chip of RMB. In Southeast financial crisis of 1997, one of the important
reasons that RMB did not depreciate was because oversea speculator lacked enough RMB. After
RMB-ization, it is possible for RMB to be accumulated to the certain level. Therefore, oversea
speculator can attack financial market of Mainland in different time, place and scale, which results in
financial crisis.
4.2 Weakening the effectiveness of monetary policy of Mainland
On the one hand, RMB is able to flow between Mainland and Hong Kong after RMB-ization. If
inflation of Mainland takes place, interest rate should be raised by monetary authority of Mainland to
contract aggregate money supply so that oversea RMB flow into Mainland. Thus, it can have an effect
on monetary policy of Mainland. By contraries, if deflation of Mainland takes place, monetary authority
should fall interest rate to expand aggregate money supply. As a result, RMB of Mainland can flow into
Hong Kong so that monetary policy of Mainland also is affected.
On the other hand, when exchange rate of RMB in foreign exchange market of Hong Kong is different
from RMB exchange rate of Mainland after RMB-ization, it will have impact on exchange rate
mechanism of RMB in Mainland. If people anticipate that exchange rate of RMB may be variable, the
demand and supply of RMB in foreign exchange market should be affected so as to directly influence
exchange rate of RMB. When the fluctuation of RMB exchange rate is big, Chinese center bank has
difficulty in managing foreign exchange market. Therefore, RMB exchange rate of Mainland
disagreeing with that of foreign exchange market in Hong Kong should cause the change in the demand
and supply of RMB. It finally also affects the effectiveness of monetary policy of Mainland.
4.3 Increasing the difficulties in anti-counterfeit money
Large-scale RMB flowing out increases the possibility that RMB is fabricated. The related research
proved that the probability of currency fabricated positively correlated with the circulating scope of
currency. Consequently, the amount of counterfeit RMB in the oversea will increase after RMB-ization.
If a great lot of counterfeit RMB flow into Mainland, it should inevitably influence the international
prestige of RMB and the normal development of Mainland economy. Once this kind of phenomenon
appears, it should increase the difficulties in anti-counterfeit money of Mainland.
4.4 Providing the convenience for money laundering, Mainland capital sheltering from taxation
control and capital flight
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，
Firstly RMB-ization should provide the channel for the illegal merchant laundering money. After
RMB-ization, it is possible for a lot of RMB dissociating outside bank system of Hong Kong to
complete money laundering through the illegal channel, such as illegal money shop exchanging.
Secondly, with Hong Kong stock exchange gradually unloosing some limits, such as permitting private
enterprises of Mainland to list in Hong Kong stock exchange, it is possible for the enterprises of
Mainland to use information asymmetry of capital flow between Mainland and Hong Kong and choose
to register in Hong Kong so as to shelter from tax burden of Mainland. Thus, revenue should greatly
outflow from Mainland to Hong Kong. It is disadvantageous to Mainland department of taxation
monitoring enterprise’s tax. Finally, due to RMB free convertibility in Hong Kong, capital in RMB
accessing to Hong Kong may be exchanged for international currency to further shift. Therefore, these
capitals should evade all kinds of control of Mainland to a certain extent and realize capital flight.
5 Conclusions and Policy Implications
According to the above analysis, we can conclude that RMB-ization in Hong Kong has not only positive
but also negative effects on economic development of Mainland and Hong Kong. For the sake of being
more advantageous to economic development of Hong Kong and Mainland in the long-run, that is, more
enjoying the benefit which RMB-ization in Hong Kong brings about and simultaneously avoiding the
disadvantageous effect on economic development which RMB-ization in Hong Kong has, this paper
puts forward that it is a good choice of setting up optimum currency area of RMB between Hong Kong
and Mainland from the theory and practice perspective. Constructing optimum currency area of RMB is
a systematic project after all. Some foundational condition should be prepared well in the course of
setting up optimum currency area of RMB. Only these foundational conditions having been ripe, can
optimum currency area of RMB be realized. These foundational conditions are displayed as follows:
First, steady and quick velocity of economic growth and moderate macroeconomic development should
be continuously kept. Stronger economic strength and more steady macroeconomic development will be
helpful to increasing the confidence of nonresident in holding RMB and the anticipation of RMB
revaluation.
Second, the linkage of trade between Hong Kong and Mainland should be continuously enhanced so as
to promote the development of Mainland and Hong Kong free trade area. Continual expansion of
economy and foreign trade in a nation can help its currency to play an important role in international
transactions. Thus, the further development of Mainland and Hong Kong free trade area will be helpful
to enlarging the amount of RMB circulating in Hong Kong.
Third, it should further promote direct investment in foreign countries in order to gradually improve
international investment status of China.
Fourth, the stability of exchange rate should be continuously maintained, the elasticity or flexibility of
RMB exchange rate should be further enhanced, RMB-denominated international financial asset and
financial derivative instruments should be vigorously developed.
Fifth, completely free convertibility of RMB should be speeded up. The steps of free convertibility of
RMB directly restrict the steps that RMB becomes regional currency. Therefore, if we want to enlarge
the amount of RMB circulating in Hong Kong and make RMB become regional currency as early as
possible, we should speed up the steps of completely free convertibility of RMB.
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