Mon, Dec 04, 2006 page11

• Less bang for the Hong Kong buck in China

  • AFP
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  It was a regular shopping trip for Yeung Hoi-kei to Shenzhen to take advantage of much cheaper mainland prices just across the Hong Kong border.

  But to her surprise, when she paid for a jacket with yuan, Yeung as a visitor was given her change back in Hong Kong dollars, once the preferred currency in the Chinese city due to its higher value.

  Times have changed, the shop assistant told Yeung.

  "Hong Kong dollars are worth the same as the yuan now," the assistant said.

  Yeung is just one of the tens of thousands of Hong Kong tourists and business people who travel to Shenzhen every day for work, shopping, dining or entertainment, getting what used to be an added bonus from a stronger Hong Kong dollar.

  Now, when she changed money before making her trip, she was surprised at how much the exchange rate has dropped for the local currency.

  "I used to get 106 yuan [US$13.5] for every 100 Hong Kong dollars I changed; only two months ago, I got 103 yuan. This time I only got 100 dollars and 30 cents," she complained.

  The Hong Kong dollar's fortunes have been linked to the US dollar since it was pegged to the unit in 1983 when Britain sought to maintain confidence in the territory during talks with Beijing on the return of the colony to Chinese rule in 1997.

  Now as the US dollar weakens steadily and the yuan rises on the back of China's booming economy, locals are finding that their mainland compatriots, who flood the city as tourists, may be getting the better deal.

  Analysts are confident the yuan will continue to rise as the US economy slows, with additional pressure coming from Washington which wants Beijing to allow the unit to float freely so as to help remedy a massive trade imbalance.

  The yuan and its future will he high on the agenda later this month when US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke visit China and the currency's gains have picked up pace as a result.

  "The strengthening of the yuan reflects global financial markets' interest in China's economy," said Grace Ng (吳向紅), greater China economist at JP Morgan Chase.

  Although the Hong Kong Monetary Authority says a strengthening yuan will not affect monetary policy, some analysts suggest a link between the Hong Kong and mainland currencies is inevitable at some point given increasing integration of the two economies.

  Other analysts see no need for Hong Kong to abandon a system that has worked well over the years despite the best efforts of speculators to break the US dollar link, most notably during the 1997-1998 Asian financial crisis.

  Jun Ma (馬駿), chief economist for Greater China at Deutsche Bank, believes the Hong Kong peg should remain intact in the foreseeable future.

  "Politically, it is unwise for policy makers in Hong Kong to fix a well-functioning Hong Kong dollar regime and subject the financial system to unnecessary risks, especially at a time when the economy remains fairly healthy," he wrote in a report.

  Should the peg be switched to the yuan, the Hong Kong currency could see a long-term appreciation against the US dollar, leading to a substantial loss in competitiveness and perhaps recession, Ma argued.

  Ng also believes Hong Kong is not ready to re-peg to the yuan.

  "The problem is that the yuan is not a freely convertible currency, so in the short-term it would not be practical to convert it," she said.
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