The Bet of HK Currency Board System: Peg to US Dollar Gives Way to Peg to RMB

Abstract

Given that the exchange rate of Hong Kong Dollar (HK Dollar) has repeatedly touched the exchange guarantee of the weak and the strong side during recent years beginning from 2008, some scholars began to hold suspicion to its stability. After studying the economic fundamentals, among them the nominal GDP growth rates and inflation rates, the author found that there are endogenous contradictions in economic basis between Hong Kong (HK) and the United States (US), making the linked exchange rate system expose its underbelly. This paper aims to explore the possibility that HK Dollar turns to peg to renminbi (RMB) by studying economic interactions between mainland China and Hong Kong. With the purpose of providing a clear vision in studying how the economic interactions have impacts on their capital flux, and how the mass of capital floods therefore affects the possibility of the peg of the two currencies, this study attempts to divide economic exchanges into direct and indirect factors, the former including goods trade, tourism services and direct investment and the latter mainly including entrepot trade. Based on the detailed data analysis, this research arrives at the conclusion that HK Dollar should peg to RMB also by conceiving the internationalism of RMB as the booster.