Hong Kong, China

4.1 The fate of the Hong Kong Dollar

Immediately following the revaluation of renminbi in July 2005, the Hong Kong Monetary Authority (HKMA) released an announcement by Acting Financial Secretary, Mr. Stephen Ip stating, “The Government has no intention at all to change the Linked Exchange Rate system which has served Hong Kong [sic] well for more than 21 years and has been the anchor of our economic stability.” The exchange rate between the Hong Kong dollar (HKD) and the renminbi now fluctuates within a narrow range.

HKMA’s decision to stay on the US dollar (USD)-pegged system appears sensible for the short term. The devaluation of the Hong Kong dollar (HKD) vis-à-vis the renminbi is expected to contribute to ongoing recovery of the Hong Kong, China (HKC) economy. The HKC economy has also benefited from increasing tourism from the mainland. After all, the HKC economy specializes in services including banking, securities, tourism and real estate. International competitiveness affected by exchange rate fluctuations does not impact these service sectors as heavily as they would hit manufacturing sectors.

The currency board system adopted by HKC in 1983 is a fixed exchange rate with freedom of capital flow at the expense of losing the independence of monetary policy according to the trilemma theory. HKMA’s policy is more subject to US federal policy than PRC central bank policy. However, assuming a lack of inconvertibility of the renminbi, heavy regulation on international capital flow and the immaturity of the financial system in the mainland, maintaining the status quo of HKD remains significant for continued utilization of HKC as an international financial center.

Due to the modest scale of the revaluation of renminbi in July 2005, HKMA’s decision attracted little attention. The revaluation is a first step toward a flexible renminbi with full convertibility. Shortly following the revaluation, the People’s Bank of China (PBOC) issued circulars to expand forex trading allowing renminbi and foreign currency swap transactions. These are clear indicators the PBOC envisages more fluctuation of renminbi exchange rates in the future and feels the necessity of providing participants with more risk hedge instruments.

Economic integration between HKC and the Mainland, particularly the southern region of the PRC, will deepen as more HKD circulate in the PRC. More renminbi notes will circulate in HKC, as the renminbi becomes a flexible and fully convertible currency. In the future HKC and Beijing may need to revisit to the relevance of “one country, two currencies, two monetary systems and two monetary authorities which are mutually independent,” as stated by Mr. Joseph Yam, HKMA Chief Executive. HKC and Beijing may consider a re- peg of the renminbi, an abolition of the HKD, or the creation of an optimum currency area covering the PRC in light of the transaction costs, currency substitution, and political and economic factors. (3 October 2005)

4.2 Tourism will be king for the future economy of HKC (part 1)

Until recently, the manufacturing, financial and tourism sectors in Hong Kong, China (HKC) served as the three main engines driving the local economy. That is now changing. Because many manufacturing industries relocated to southern China in the 1990s in search of cheap labor and low office rental costs, there are now almost no manufacturing industries remaining in HKC. Presently HKC’s financial sector still offers some advantages but since PRC authorities have deregulated and opened more financial markets on the Mainland as a result of WTO entry, more foreign financial institutions have started to expand in the PRC by shifting some operations from HKC to Mainland cities.

In general, the scope of business for foreign banks on the Mainland has been growing. As an example, foreign banks extended their branch networks in the Mainland from 157 operational units in 2001 to 226 in 2005, and currently have 249 representative offices in the PRC. Moreover, foreign banks are actively acquiring equity in PRC financial institutions or joining these institutions in equity participation. In some cases, the foreign stake in these participatory deals has hit the ceiling of 25 percent. Another noticeable change is that foreign banks are no longer limiting their services to corporate banking for multinational enterprises but are also offering products and services for PRC enterprises and individuals in renminbi. All these developments suggest that HKC’s relative advantage in the financial sector is waning vis-à-vis the Mainland. Even though the past few years show a strong recovery for the HKC economy after its long recession, many structural problems have yet to be properly addressed. This is one reason why HKC authorities are promoting tourism as an alternative engine for growth.

To appreciate the full potential of a future HKC tourism industry, it’s important to factor in both the supply and demand sides of the industry. On the supply side, HKC’s main weakness is the lack of historical cites and monuments to attract traditional international tourists. Similarly, the prices of goods and services there are relatively high, even in comparison with Japan. Of course, it naturally depends on which commodities and services, but many ordinary Japanese feel that price levels on average are at least 30–40 percent higher than back home. What’s more, the quality of services does not always offer value, with some tourist now claiming that even the legendary Cantonese cuisine is beginning to lose its preeminence. And although the decline of the US dollar, to which the HK dollar pegs under the currency board system, offered some price relief for tourist, that is only temporary. In the medium run, if the renminbi is further revalued and becomes fully convertible, HKC might then exit from its currency board system. At this point, price levels will again become very expensive for many foreign tourists.

On the demand side, HKC’s tourism industry has most recently relied on a dramatic influx of Mainland tourists while the number of tourists from elsewhere remained stagnant. Since 2003, Chinese tourists have been making individual trips to HKC where they spend a sizeable chunk of their holiday money purchasing commodities such as gold, precious metals and top brand goods. It is reported that average per capita spending of Chinese tourists in 2003 was more than 6,000HKD, while the spending of other tourists is between 4,000– 5,000HKD. Is this likely to continue?

When forecasting the growth of tourist spending in HKC, there are three variables to keep in mind. First, the PRC’s economic growth may moderate in the near future from current annual growth rate of more than 9 percent to around 7 percent. Second, wealthier Chinese may start to choose other destinations, such as Europe. Third, as consumer markets in the Mainland become more mature Chinese tourists will not need to travel to HKC to buy high-end goods.

So from both a demand and supply standpoint there may be few reasons for optimism about the future of tourism in HKC. HKC authorities may need to work out a clearer vision for regional development and find new ways to attract international tourists. Such an undertaking would be indispensable for HKC’s future economy, assuming that other industries continue to become less competitive. The next article in this series will consider what HKC authorities might do to promote a more attractive tourism industry. (10 February 2006)

4.3 Will tourism be the magic kingdom in HKC’s future? (part 2)

In recent years the biggest tourism project in Hong Kong, China (HKC) aimed at attracting foreign tourists was the construction of Disneyland on Lantao Island. Whether this project alone will lure foreign tourists to HKC remains uncertain. For many tourists Disneyland is already a commonplace attraction in their home countries, and many argue that foreign tourists from developed countries seek travel experiences that are completely different from a visit to a well-known theme park.

Regardless of the number of foreign tourists, the Disneyland in HKC is expecting many tourists from the Mainland (see Table page 39), which in the medium-term may provide the number of visitors needed to support the project. But there is little stopping Mainland cities such as Shanghai and Beijing from becoming competitors, in particular if the HKC Disneyland shows signs of success. This casts doubt on the long-term sustainability of this type of tourism development project.

A better long-term approach might be for the HKC authorities to develop a tourist industry that leverages HKC’s own competitive advantages while catering to many foreign tourists’ preference for unique, eco-friendly travel experiences. HKC is actually well situated for such a plan since it is a geographically small urban society with a fairly good public transportation system. And, contrary to many people’s preconceived ideas about HKC as nothing more than a crowded shopping area with little natural beauty, HKC actually enjoys an abundance of natural endowments. Among these natural treasures are many small islands with surprisingly beautiful scenery. The islands, as well as in the new territory close to Shenzhen , all have mountains with marvelous trekking routes. In fact, one trekking courses called the “Macrohorse Trail” covers 100 km and attracts many foreign trekkers every year even though few HKC natives leave behind their congested urban areas and busy lifestyles to walk this course.

The most drastic measure that could be considered by HKC would be a plan to remove all cars and motorcycles from the town and make all of HKC an exclusive environmentally friendly “eco-region.” By making the best use of its unique geographical characteristics HKC could attract many tourists from around the world, and more importantly it could showcase to the world an attractive, future model of urban development.

HKC might also have a certain advantage in implementing such initiatives since contrary to the prevailing conventional wisdom the local financial regulation and public finance policies are already somewhat interventionist in nature. However, the sad reality is that the majority of people in HKC are not yet sensitive to environmental imperatives even though the environmental degradation associated with air pollution, mainly coming from southern China region such as Shenzhen, Guangzhou, and Dongguan, has steadily worsened. Any efforts to improve HKC’s environment and strengthen its competitiveness in tourism will also need to consider the future of greater southern China. No doubt this is a challenge, but it is definitely a worthwhile task for HKC. (14 February 2006)

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