Study rationale
The monetary authority of Hong Kong has stabilized the currency since 1983, and this has been defined as an external stability exchange value of the Hong Kong currency (Lee, 2012). The paper will determine the exchange rate of the HKD in the foreign exchange market especially against the US Dollar. Consequently, the exchange rate of the HKD regarding the foreign currencies, the RBM will follow the same direction as in the exchange rates of the USD. Therefore, when the USD experience some depreciation against the RBM, then the HDK will also depreciate accordingly.
Objectives
Methodology
Since this is a quantitative study, the research paper is based on secondary data and most of the information will be obtained from the literature review.
The search data is obtained and analyzed while conducting this study to assess some possible concerns that are influencing the exchanging rates between the local currencies against the foreign currencies like the USD.
There is some variance that took place while analyzing the results of this research because the published data were collected mainly to analyze different research because secondary data were the only option to be used in this research paper.
Relationship between the RMB and HDK exchange rates
Hong Kong is a small but open economy. Therefore, it permits unrestricted flow of global products and resources. The city believes that revaluing the RMB against the USD will dampen the competitiveness of the exports from China to the United States. Therefore, the current and future flow of cash in Hong Kong with its enterprises that are export oriented will be affected adversely. Consequently, the stock index in Hong Kong will decline as it responds to the revaluation of the RMB against the USD or HKD.
On the other hand, while revaluing the RMB against the HDK, there will be an additional flow of capital from China to markets of products and assets in Hong Kong. Consequently, the index of the stock market in Hong Kong will be expected to rise. However, the effect of the stock market index on Hong Kong will be determined minus an empirical study.
According to the classical economic theory, the relationship that exists between the performance of the stock market and the behavior of the exchange rate confirms that the movement of currencies will affect the global competitiveness, the balance of trade, and the real output of the economy. In return, it will also affect the future flow of cash of corporations with their stock prices. Similarly, the market price of RMB and HKD may change significantly because of some factors such as liquidity of the market, demand and supply, and the exchange rate between RMB and HKD (Frank & Chow, 2007). Consequently, the investors will pay for more and gets less as they buy and sell the units of HKD on the SEHK than the units of RMB. When there is an occurrence of suspension between the RMB and HKD counter, the holders of the units will be able to market their units to the relevant counters on the Stock Exchange of Hong Kong (SEHK). Therefore, investors who do not have the RMB accounts will purchase and sell the traded units of HKD only.
Effects of RMB/HDK
Market and policy oriented
Expansion of trading territories
In 2001, the trade settlement program of RMB was expanded to all territories of China (Li-gang & Tsang, 2008). Similarly, the businesses of RMB in Hong Kong was also extended to corporations and institutions. During the same year, the government of China implemented a program known as the RQFII to provide room for foreign investors to invest in the local security market. Consequently, the capital flow of RMB shifted to Mainland and flowed in all directions. This was an indication of a step forward in the process of internationalizing the RMB. As a result, Hong Kong became the center for world product of engineering and trading the RMB.
Relationship between exchange rate and inflation
Stability
Since 2008, the exchange rate for RMB has been kept stable particularly against the USD. During the process of world recovery from the financial crisis, the exports in Asia recovered due to the increase in interest rates (Cheung & Yuen, 2002). However, several questions arise whether the exchange rate of RMB will rise against the USD in the future years. However, the answer was based on the bearing of the monetary and the financial stability in Hong Kong.
Pricing
The appreciation of the RMB can influence the consumer price inflation directly in Hong Kong due to the effects of import pricing. On the other hand, it can influence it indirectly through its effects on the aggregate demand and the conditions of monetary policies. Most of the requirements in Hong Long are imported from other countries because it is considered as a service based and a small economy. Therefore, the import prices are the major determinants of inflation in Hong Kong.
According to the study of the HKMA, the imported inflation is not much as it is perceived. Therefore, domestic factors are the determinants of inflation in Hong Kong.
However, there has not been a high correlation between the consumer price inflation and the import price inflation in Hong Kong until 2008 when there was high inflation due to price surge around the globe (Cheung & Yuen, 2001). On the other hand, the consumer price inflation has been correlated closely with the housing price inflation but with some economic lags. This indicates that the domestic factors play important roles as compared to the external factors during the determination of inflation in Hong Kong.
Timeframe: Since this study will apply the use of Granger causality tests, the research paper will be complete after two months since a lot of time will be needed to convert the RMB into Hong Kong Dollars and the Hang Seng index.
References
Cheung, Y., & Yuen, J. (2001). Comparative Economics. Effects of U.S Inflation on Hong Kong, 3(1).
Cheung, Y., & Yuen, J. (2002). Effects of U.S Inflation on Hong Kong. Comparative Economics, 30(1).
Dornbusch, R., & Fisher, S. (1980). Exchange Rates and the Current Account. American Economic Review, 70(5).
Frank, L., & Chow, K. (2007). HKMA Working Paper. How Much Of Hong Kong Imports From China Mainland Is Retained For Domestic Use.
Lee, W. (2012). Modern Economy. Relationship between Real Exchange Rate of RMB and Hong Kong Stock Market Index, 3(1).
Li-gang, L., & Tsang, A. (2008). HKMA Working Paper. Exchange Rate Pass Through To Domestic Inflation In Hong Kong.
