Until a few years ago, the Hong Kong dollar was welcome on the mainland as cab drivers and others happily accepted our currency in lieu of the yuan, since its value was always greater than that of the Chinese currency. No more.
In January 2007, the yuan first achieved parity with the Hong Kong dollar and then powered past it. Now, our dollar is worth only about 0.88 yuan.
This is because, from 2005 to 2008, China allowed its currency to appreciate against the US dollar, to which the Hong Kong dollar is pegged. During that period, the yuan rose 21 per cent. This progression halted with the global financial crisis, but China is again under heavy pressure to allow the yuan to rise against the dollar.
All signs are that Beijing has decided to allow its currency to rise again, not necessarily as a result of foreign pressure but because Chinese officials believe such a move would be good for the country, in part to counter inflation.
Many economists say that the Chinese currency is undervalued by 20 to 40 per cent but, of course, Beijing will not allow any big-bang revaluation. Instead, the likelihood is that it will once again allow its currency to rise gradually, probably at about 5 per cent a year, beginning this year and continuing for a decade.
What would that do to the purchasing power of the Hong Kong dollar? Well, a back-of-the-envelope calculation suggests that, in 10 years, our local dollar would be worth little more than half a yuan. That is to say, compared to the 1990s, it would have lost half its purchasing power.
Recently, Fred Bergsten, director of the Peterson Institute for International Economics, told a US congressional committee that Hong Kong was manipulating its currency to 'maintain a close relationship' with the yuan. Of course, we haven't been doing that. In fact, Hong Kong has pegged its currency to the US dollar since 1983 and, as the American currency has declined in value, so has the Hong Kong dollar.