Monday, May 16, 2011

Yuan Use Increases In Hong Kong

Interesting story here about how the yuan is increasingly used in Hong Kong, creating troubles both for Hong Kong and mainland China.

With the Hong Kong dollar strictly pegged to the U.S. dollar while the yuan gradually appreciates, it seems that the only reason why anyone in Hong Kong would want to have their savings in Hong Kong dollar accounts is the expectations that the peg won't last and that the Hong Kong dollar will be revalued and pegged to the yuan instead.

Ultimately, I believe that this will happen, as a first step towards the inevitable ditching of the Hong Kong dollar replaced by a monetary union between Hong Kong and mainland China. The only question is when this will happen. Despite the clear economic irrationality of the U.S. dollar peg, Hong Kong politicians seems to want to postpone change for as long as possible. However, an increased use of the yuan in capital markets as investors want to benefit from the appreciation of the yuan could force Hong Kong politician to move sooner than they want.