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Renminbi Effects on the Economy of Hong Kong

The paper discusses the working and effects of Renminbi in the economy of Hong Kong. It has the parts of introduction, positives effects of Renminbi on the economy of Hong Kong, negative effects of Renminbi on its economy, conclusive summary the list of material used as reference for this paper.

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Introduction

Renminbi is the official currency of the Chinese republic. It is otherwise referred to as the Chinese yuan. Renminbi is issue by the People’s bank of China which is the Central Bank of China. The bank issued the first notes of Renminbi in 1948. Chinese economy has gained some significant importance in the past thirty years. Initially the economy was designed in a way that it was centrally planned and remained closed to international business transactions; however, the semi-autonomous Hong Kong was already engaged in the international trade, but found it difficult since it had not started using renminbi. During that period, the Chinese government had direct control on the economic activities and therefore performance. However, in the past thirty years, the economy has witnessed several changes that have impacted on its currency. The economy now operates on free market economic system and this has enhanced the trade between the mainland and Hong Kong. This has encouraged quick growth of the private sector. The impact of China’s economic performance has actually been felt in the world market; this is supported by Wu (2005). This impact can be attributed to Hong Kong as China’s International Financial Center.

Changes in the China’s renminbi currency follow the government’s move to liberalize prices of goods and services in the market, establishment of varied system of banking and enhancement of the stock market. The economic changes also included opening up Chinese economy to international trade and transactions. The government of China through changes in its monetary and fiscal policies de-linked the Chinese currency from the United State of American dollar. It revalued its own currency by around two percent; this subsequently led to increase in the value of renminbi by about twenty percent. This had a turning point in Hong Kong’s economy. According to analysis by the World Fact Book in 2009, China is second after United States of America in term of economic growth. With the current vibrant economic activities in China, especially Hong Kong, the renminbi is likely to gain international currency status, though this will take place on gradual basis.

Positive effects

Since the economic restructuring of Chinese economy, the Chinese yuan or renminbi has played a bigger role in many economic sector of Hong Kong. The China’s currency currently has not yet reached the status of international currency, but its new value is set to have positive impact on the economic and the financial sector of Hong Kong. In the year 2007, it was recorded that Hong Kong was the only one among the cities and urban centers outside the mainland with fully operational stock and bond market (McGiffert, 2008). Strong currency has enabled many economic activities to rise in Hong Kong; the rising value of renminbi has attracted the attention of foreign investors who have actually focused some of foreign investment portfolios to Hong Kong; this has increased rates of capital inflow into Hong Kong. Important to note is also the fact that Hong Kong has increased its external trade activities using renminbi (Forbes, 2005).

Infrastructures are amongst the important drivers of economic growth. The strengthening value and changing role of renminbi has facilitated the necessity of infrastructural development in Hong Kong so as to facilitate trade and activities. The government authorities in Hong Kong have initiated many projects which are meant to improve the existing infrastructures and also construct new ones; the constructions include establishment of bridges and railway lines that link Hong Kong to the mainland (Rotberg, 2008). The improved and new infrastructures will play a major role in boosting flow of tourism into the region; facilitate transport of merchandise to and from the Chinese main land and also ease movement of passenger traffics. The prices of assets have also risen substantially in the Hong Kong. As much as the high prices may be disadvantageous to buyers, asset owners have the advantages of increased value of their assets. If the increasing value of renminbi continues for long term then asset market is likely to be flooded, since the high prices are an incentive to attract more investment in Hong Kong’s asset market; this is in line with the economic demand and supply. Hong Kong imports most of its food stuff from the mainland, in most cases it is forced to pay for the imports through renminbi which is stronger than Hong Kong dollar thereby making imports relatively expensive. Other Asian countries are also important trade partners to Hong Kong. The introduction of renminbi as mode of settling both internal and external transactions has enhanced the trade activities between Hong Kong and these other Asian nations. The Asian nations have also accepted the use of renminbi to settle trade transactions between them, Hong Kong and the Chinese mainland. This has played a major role in boosting Hong Kong’s foreign trade activities and thereby increasing its GDP5 growth rate. Hong Kong and the People’s Republic of China at large have been witnessing increased export due to revaluation of renminbi.

The ability to use renminbi in international transactions has increased a lot of trade activities in Hong Kong’s private sector. This has resulted in increased career opportunities hence reduced unemployment. As many foreign investors come to Hong Kong to establish their businesses the more the demand for professional experts they require either working and managing their businesses or acting as consultants. Another contribution of increased foreign investments is that the new businesses will require the use of raw materials which may be sourced from trade partners. With proper infrastructure in place and relatively efficient banks dealing in renminbi products, Hong Kong is better placed to handle a wider range of offshore renminbi transactions, in fact it has been reported that such plans began some years ago before the mainland China opened its economic and trade boundaries to the international transactions and foreign direct investments.

Important to note is also the fact that many of the Hong Kong residents work in the main land. Since Hong Kong has started adopting the use of Renminbi as one of the ways through which it can settle its business transactions, it has been easy for workers to receive their wages and salaries in renminbi and use then in Hong Kong without the need to reconvert. It can also be argued that through workers working in the mainland Hong Kong gets sufficient renminbi which it can use in importing goods and services with ease from the mainland, this has also the advantage of eliminating risks that are associated with exchange and exchange rates. The risks actually existed before the usage of renminbi began, the consequence was that many investors from the mainland dreaded investing in other markets they deemed insecure.

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Amongst the many benefits of revalued renminbi’s use in Hong Kong has included the foreign direct investments. This has brought varied technologies and expertise from foreign countries where they are widely used. The Hong Kong people have been able to benefit from and learn the new technological know-how and expertise that enter the region through in foreign investors.

The main currency that has been used for business transactions in Hong Kong is the Hong Kong’s dollar. With the strengthening of renminbi, Hong Kong has started using the renminbi more frequently in its internal and external financial transactions. However, it is worth noting that Hong Kong dollar remains the dominant medium of exchange in Hong Kong. But since the renminbi is gaining acceptance in Hong Kong, it is likely to be the preferred medium of exchange for the international trade; therefore, the Hong Kong dollar has little prospect of becoming international currency even though the dollar still remains dominant currency in Hong Kong. Statistics from the banks in Hong Kong show that there are a good number of people whose accounts are credited in renminbi. Employees in certain companies and institutions are also being paid through in the form of renminbi. The banking sector in Hong Kong has started offering various renminbi currency services. Actually, there are banks dealing in Renminbi only. An example of such banks is the Bank of China (Hong Kong) Limited.. These banks offer services like renminbi accounts, renminbi debit and credit cards, renminbi cheque, currency exchange and transfer of renminbi currency from the holding accounts to preferred accounts. In fact the renminbi banks can issue Hong Kong residents with debit and credit cards so that they can use them in the China’s mainland (The Banking Supervision Department, 2007). The use of renminbi in Hong Kong has offered many companies and financial institutions options of choosing what mode of transaction is appropriate for them. The companies now have more flexibility that ever before to manage the risks that come with relatively unpredictable rate of foreign exchange. It can be assumed that fluctuations in exchange rates do not affect both the renminbi and Hong Kong dollar the same way; this enables to the individual companies to choose on the currency whose exchange rate is favorable. Hong Kong and the mainland have a strong trading partnership. The operation of renminbi in Hong Kong has played a very important role in strengthening the ties between the financial sector in the mainland and that of Hong Kong. Since Hong Kong has the strategic ability to link with external financial institutions, it has the capacity to enable international renminbi transactions. This has the potential of attracting more financial businesses into Hong Kong and therefore the mainland China.

The financial system in Hong Kong has international standards of operations; however. This is one of the direct consequences emanating from its adoption of Renminbi for its trading activities. Since it recognized the use of renminbi which is gaining international recognition, its economy is bound to compete in the international financial market. The Hong Kong dollar is pegged on the American dollar, otherwise with the introduction of renminbi in Hong Kong the role of U.S dollar has gradually reduced since Hong Kong can now choose to use the Renminbi for trade with some countries and other Asian nations without necessarily considering the U.S dollar.

Since the since Renminbi started being used in Hong Kong there has been efforts made by the Hong Kong authorities to venture into providing more renminbi services to various clients, both local and international. The possible new renminbi services could include the expansion of the already established program for renminbi bond, authorization of the Hong Kong banks to provide further services directly related to renminbi and come up with more financial services. The financial sector in the mainland has already gained some maturity due to tight competitions of the mainland capital flow with other financial institutions from the international community. Since Hong Kong has a direct link with the mainland it remains to be said that the maturity of the mainland financial sector will definitely boost the Hong Kong’s financial sector to even higher performance; this means that the efforts made by the mainland to improve performance of renminbi may have a direct positive effects to the Hong Kong’s financial performance. It is even easier to link the capital market in Hong Kong to that of the mainland. Since one currency can be used across the border the companies in the two regions can efficiently list their shares in any of them without the fear of setbacks in terms of performance. With the adoption of renminbi, there is a challenge to the Hong Kong Dollar. The more the renminbi is used in Hong Kong the more it gains popularity with the locals. This is likely to permanently make people prefer it to the Hong Kong dollar. The reason is that it is gradually gaining complete convertibility. It is therefore, right to argue that Hong Kong has enabled China to have an International Financial Center.

Negative effects

As much as there are lots of benefits that accrue due to the use of renminbi in Hong Kong there are certain challenges attached to it. Looking at the gradually diminishing use of Hong Kong dollar, it is can be argued that the dollar is slowly loosing its chances of being used outside Hong Kong. The use of Renminbi may make the popularity of the Hong Kong dollar to fade since both currency compete within one economic system. This will mean that with time the dollar will not have major activities in the Hong Kong’s economy. With two currencies in use within one system there is some confusion amongst the users. The people of Hong Kong have been allowed to choose their own preferred mode of payments from the two currencies operating in Hong Kong (Masuyama et al, 1999). The challenge is that some traders who prefer the renminbi to Hong Kong dollar may not accept to receive Hong Kong dollar from customers who may happen to only have that. In some cases it becomes tedious when some of the Hong Kong is forced to convert their dollar to renminbi in order to purchase from traders who prefer the renminbi to the other unit of payment. It is not impossible to find that some people exclusively prefer either the Hong Kong dollar or renminbi, especially the business people. This has the implication that their clients or they must have two accounts each for either of the currency. It may be argued that one can be converted to the other, taking into account the fluctuating prices of goods and services and the rates of inter-conversion of the two currencies into the other it may be costly to frequently inter-convert the two currencies (Business International Asia/Pacific Ltd, 1997).

Hong Kong has been semi-autonomous for a very long time; however, since it returned to be part of China, China has been gaining influence gradually. Gradually Hong Kong is loosing its semi-autonomy to the mainland China (Masuyama et al, 1999). This is actually facilitated by the adoption of renminbi as a valid currency to be used for many of its transactions both locally and abroad. Since renminbi policies are dictated by the mainland, what it means. This means Hong Kong must take into consideration when formulating its financial policies the use of Renminbi within the semi-autonomous territory. This can also mean that the decision by the mainland that may either adversely affect or improve the mainland’s economic activities will have corresponding direct effects on Hong Kong’s economic activities too.

The use and value of renminbi are mainly influenced by the mainland China. In any case the economy of the mainland may pick on downward trend then that of Hong Kong is also bound to experience the negative effects of economic slow down in the mainland. This is explained by the fact that renminbi is gaining popular use in Hong Kong thereby making Hong Kong’s economy to depend so much on the mainland’s renminbi. With the introduction of renminbi in Hong Kong many foreign companies moved into Hong Kong to capitalize of the expected abundant inflow of funds into Hong Kong from the mainland and other economies. In fact the inflow of cash from the mainland helped in the development and enhancement of Hong Kong’s investments the security industry, but there might have been over speculation on renminbi. The result is that the value of share for the foreign companies and investors has taken a downward trend. The problem is that the Hong Kong’s financial sector is dominated by firms from overseas; this places the sector on balance. Should be firms find it unprofitable to continue conducting business in Hong Kong they are likely to opt out. In this case the sector faces the danger of collapse or slowed activities. To use renminbi in Hong Kong requires that an individual must have renminbi account with the banks offering renminbi services and to effect payments using cheque one must have renminbi cheque books. In the cases where individuals have accounts for both the Hong Kong dollar and the renminbi separately, such people must have cheque books for each if they must use either. Any cost that must be met in this case renders the use of both the currencies expensive to the users.

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Another challenge faced by the Hong Kong’s financial authorities is the compilation of financial reports. People of Hong Kong use both the Hong Kong dollar and the renminbi. In fact the use of both currencies leads to a lot of work in terms of data and record storage because each currency must be treated in its own uniqueness and converting one to the other requires a lot of accuracy. The two currencies have different values and therefore cannot be treated equally in terms of performance and with the fluctuations in the exchange rates the financial report based on both currencies may not provide accurate data on the performance of Hong Kong’s economy.

The revaluation of renminbi by the Chinese government was not a welcome idea from the United States of America. Americans argue that revaluation was deliberately meant to make Chinese exports to be cheap at the expense of letting exports from America to be expensive and increase unemployment in United States. There are arguments that the heated debate on putting pressure on China to let its currency find its own value in the market is likely to convince the Chinese authority to let the renminbi to start appreciating (Hufbauer et al, 2006). The uncertainty about whether Chinese authority will succumb to the international pressure or not places renminbi at an unstable condition, it is more vulnerable. This vulnerability has a great implication on Hong Kong’s economy now that it is also reliant on the renminbi in conducting its transactions both locally and abroad; due to this uncertainty. There is a lot of complains about the revaluation of the renminbi, due to this, the use continued use of this currency by Hong Kong puts its economy in doubt. China as may decide to give into pressure and let the Renminbi be subjected to leveling financial force. It therefore means that the ability of Hong Kong to become an international financial sector is greatly dictated by Chinese actions in relation to the renminbi. From this kind of scenario we can say that Hong Kong should stop being over-dependent on the renminbi and focus on strengthening the Hong Kong dollar so as to gain economic independence.

It has been argued that Chinese government has been manipulating its money market to achieve its financial objectives and also to gain competitive edge against certain foreign currencies. The revaluation of renminbi is also based on these arguments. Should this be true then further manipulation may result into economic woes in China which will definitely affect the financial and the economic sector of Hong Kong.

Conclusion

The revaluation of renminbi enabled the currency to gain popularity amongst the Asian countries. Its introduction in Hong Kong to be used as one of the currencies used a medium of exchange has exerted many impacts both financially and economically in general. Hong Kong had been using the Hong Kong dollar before the introduction of renminbi. Otherwise after renminbi gained popularity among the Hong Kong people it became the preferred mode of doing transactions amongst some people of Hong Kong. Renminbi have started gaining international recognition especially amongst the Asian countries. Due to the value and its recognition outside China, Hong Kong has adopted the use of renminbi in its business transactions both within and outside Hong Kong. It is able to pay for some of its imports using the renminbi currency. The government in Hong Kong has allowed the establishment of renminbi services by both the local and foreign banks. These services include accounts for renminbi, renminbi cheque books; these banks have also been allowed to expand the products of renminbi services (Sharpe, 2007). Hong Kong is first part of China outside the mainland which has fully operational financial and capital market. This has been enabled through establishment of strong financial sector.

The use of renminbi attracted many foreign investors into Hong Kong. Many companies flowed into Hong Kong with a lot of speculations on further revaluation of renminbi. The companies hoped to benefit from this. The effect of this entourage was increased performance of Hong Kong’s economy and many of the Hong Kong people also got job opportunities. Moreover, the increased industrial activities helped increase Hong Kong’s export and therefore its foreign reserves. The combination of the new companies and the need to connect Hong Kong to the mainland led to the initiation of several infrastructural projects. These projects are meant to increase communication between the mainland and Hong Kong and also enhance the transport network within Hong Kong. Properly working infrastructure is also expected to boost the Hong Kong’s tourism sector. With the improved road networks more tourists are expected to come to Hong Kong.

The improved economy of Hong Kong can party be attributed to the use of renminbi which is stronger than the Hong Kong dollar11. Renminbi has enabled the region to conduct foreign transactions. There are so many people from Hong Kong who are employed in the mainland. It is easy for these people to accept salary and wage payments through renminbi because they can easily use them back in Hong Kong. Many of those who import from the mainland also find it easy to pay for their merchandise without the need to convert their currencies into others.

However, the use and dependence on renminbi by Hong Kong has its own challenges. The rising popularity of renminbi amongst the Hong Kong people is likely to suppress the value attached to the Hong Kong dollar. In fact HKD is gradually loosing its prospects of becoming an international currency as Hong Kong already prefers doing its local and external businesses using renminbi. Hong Kong has been semi-autonomous for long; with the use of the currency from the mainland the region has actually lost its autonomy in partiality to the mainland. The use of renminbi means that the economic performance of Hong Kong is linked to that of the mainland. Any financial problem in the mainland will definitely have a similar effect on that of Hong Kong. Being that the policies governing the use of renminbi are formulated by the mainland government, Hong Kong must therefore come up with monetary policies that are in consistence with that of the mainland.

There are some international organizations and nations opposed to the revaluation of Chinese renminbi currency. These international bodies have even debated possible economic sanctions against China. These debates put the stability of renminbi state. The meaning of this to Hong Kong is that its continued use of renminbi to run its economy puts the regions economic activities at the risks of collapse. It is also important to note that the use of high value renminbi attracted foreign investors to Hong Kong to take advantage of the possible revaluation of renminbi. This exposed the financial sector of Hong Kong’s economy to be dominated by foreign owned firms. However, the share values of these companies in the stock and bond market are not doing well. Hong Kong therefore runs the risks of economic recession should these foreign firms move out to other countries. Generally, it can be argued that the dependence of Hong Kong’s economy on renminbi might have many benefits but it is worth to note that for it to maintain its semi-autonomy it must strengthen the use of Hong Cong dollar and focus on policies that give the currency the opportunity to gradually gain the international currency status. This is the position that every growing economy would like to achieve. It has been argued that Chinese government has been manipulating its money market to achieve its financial objectives and also to gain competitive edge against certain foreign currencies. The revaluation of renminbi is also based on these arguments. Should this be true then further manipulation may result into economic woes in China which will definitely affect the financial and the economic sector of Hong Kong. However, the ability to use renminbi in international transactions has increased a lot of trade activities in Hong Kong’s private sector. This has resulted in increased career opportunities hence reduced unemployment. As many foreign investors come to Hong Kong to establish their businesses the more the demand for professional experts they require either working and managing their businesses or acting as consultants. Another contribution of increased foreign investments is that the new businesses will require the use of raw materials which may be sourced from trade partners

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References

Business International Asia/Pacific Ltd. (1997). Business Asia, Volume 29. California: The University of California.

Forbes, C.B. (2005). Forbes, Volume 175, Issues 1-4. California: The University of California.

Hufbauer, C.G. et al. (2006). US-China trade disputes: rising tide, rising stakes, Volumes 978-88398. Policy analyses in international economics. Peterson Institute.

Kanamori, T. and Zhao, Z. (2006). The renminbi exchange rate revaluation. Theory, Practice, and Lessons from Japan. Asian Development Bank Institute.

Masuyama et al. (1999). East Asia’s financial systems: Evolution & crisis. Institute of Southeast Asian Studies.

McGiffert, C. (2008). Hong Kong on the move: 10 years as the HKSAR. CSIS.

Rotberg, R. (2008). China into Africa: Trade, aid, and influence. Brookings Institution Press.

Sharpe, E.M. (2007). The Chinese economy. Translations and studies, Volume 40, Issues 4-6. The University of California.

The Banking Supervision Department. (2007). Hong Kong Monetary Authority Quarterly Bulletin. Renminbi Banking Business in Hong Kong. Web.

Wu, J. (2005). Understanding and interpreting Chinese economic reform. Thomson/South-Western.

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StudyCorgi. (2022, January 24). Renminbi Effects on the Economy of Hong Kong. Retrieved from https://studycorgi.com/renminbi-effects-on-the-economy-of-hong-kong/

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StudyCorgi. 2022. "Renminbi Effects on the Economy of Hong Kong." January 24, 2022. https://studycorgi.com/renminbi-effects-on-the-economy-of-hong-kong/.

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