Andrew J. Sinclair of the California Institute of Technology believes “..re-pegging the Hong Kong dollar to the renminbi is an inevitability.”
He develops his argument from what he sees as a natural arc of progress in President Xi Jin Ping’s quest for National Security and the increasing use of the renminbi as a settlement currency.
He believes such a move will not be negotiated, discussed or flagged, it’ll just, boom!, happen one day. It would be helpful if China could prepare by increasing the amount of offshore reserves held in Hong Kong which might be a coal-mine-canary for potential change.
In the event he predicts more sanctions on China, capital flight from Hong Kong and a loss of confidence based on a general sense that China is tearing up the rule book* on how Hong Kong should govern itself. But the potential of all that won’t stop China pressing ahead if, at a stroke, they end up with an offshore market for renminbi investment he argues.
[*Hong Kong’s constitution the Basic Law has some clear directions on how the financial system should operate. You might want to look at Articles 109~113 to see by how much Mr. Sinclair’s ideas are at odds with this.]
The chart here shows, despite significant growth in recent years, how small a part of global trade the renminbi is settling now. China would like to see this increase the paper argues and plugging in Hong Kong dollars, after a re-peg when they’d de facto become Rmb, would assist this. Hmm…
Nobody can say for sure this won’t happen but I have my doubts.
First, it would terrify the region, trading partners and international financial institutions to no good end. Second, in the event of such a shock I don’t follow the author’s reasoning Hong Kong would then go on to become an Rmb offshore center par excellence. Finally, I don’t see how National Security is improved by such a move. If anything the consequences would be profoundly destabilizing both politically and financially.
To flag something as ‘inevitable’ is good copy but ultimately only an opinion. The paper is a useful think-piece perhaps, but can’t be a reliable road map. But, hey, you never know….
You can read the work in full here Re-pegging the Hong Kong Dollar.
Happy Sunday.