Currency traders looking for their next big idea could do worse than talk to Wong, who runs a news stand in Hong Kong’s Central District.
Her business is one of many street stalls that line the city’s busy financial quarter, selling newspapers, magazines and bottled water to everyone from well-heeled executives to Chinese tourists on sight-seeing trips.
This varied clientele has turned Wong into an informal currency trader – and right now, she is betting that the Chinese yuan will weaken to parity against the Hong Kong dollar.
Currency Shift
The yuan has lost more than 12 per cent of its value against its neighbouring currency over the past three years, putting it on course to hit parity for the first time since 2007. The decline has hurt spending by mainland Chinese tourists, encouraged locals to cross the border for shopping trips and forced consumers and businesses across the city to adjust.
Wong has put up a sign on the side of her news stand, demanding that any customer who wants to pay in yuan accepts a one-for-one exchange rate with the Hong Kong dollar. Tourists previously baulked at this rate but they are increasingly willing to accept it, she said. Some are even asking her to give them a currency exchange without any goods changing hands.
Rising Costs
Edith, a mainland Chinese national studying for a masters degree at Hong Kong University, is among those who have been hit by the sinking value of the yuan against the Hong Kong dollar. She expects to pay around 20,000 yuan (S$3,720) more for her degree than she previously calculated, thanks to the depreciation.
“My classmates and friends from mainland are complaining about the stronger Hong Kong dollar,” Edith said, requesting to be identified by only her first name due to privacy concerns.
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Impact on Hong Kong
The currency shift has exacerbated pressure on Hong Kong, which suffered a 7.3 per cent year-on-year contraction in retail sales in November, capping nine months of declines, according to the latest data.
The most bearish analysts think China’s currency could weaken near to 7.75 per US dollar by the third quarter, a move that would put the yuan close to the top of the Hong Kong dollar’s permitted trading band against the greenback.
Dim Sum Bonds
There are some positives to the yuan’s decline, at least for those working in finance: Mainland investors chasing higher returns have rushed to buy overseas bonds, pushing southbound flows through a China-Hong Kong bond trading link to a two-year high in December. The issuance of dim sum bonds, offshore notes denominated in China’s currency, has surged as borrowers look for cheaper funding options.
Speculation
Speculation about how long Hong Kong will maintain its dollar peg has raged for years, but with the greenback soaring and China’s government still trying to get its economy back on track, this talk has taken on extra importance.
Hong Kong Monetary Authority chief executive Eddie Yue tried to quell speculation earlier this month, declaring that “we have no intention and we see no need” to change the currency regime. But the statement appears to have done little to end talk about the future of the peg.
Conclusion
In conclusion, the weakening of the Chinese yuan against the Hong Kong dollar has significant implications for both the Chinese economy and Hong Kong. While there are some benefits to the decline, such as increased investment in overseas bonds, the impact on Hong Kong’s retail sales and the speculation about the future of the dollar peg are major concerns.
FAQs
Q: What is the current exchange rate between the Chinese yuan and the Hong Kong dollar?
A: The current exchange rate is approximately 1:1, with the yuan weakening against the Hong Kong dollar.
Q: How has the decline of the yuan affected Hong Kong’s retail sales?
A: Hong Kong has suffered a 7.3 per cent year-on-year contraction in retail sales in November, capping nine months of declines.
Q: What is the future of Hong Kong’s dollar peg?
A: The future of the dollar peg is uncertain, with speculation raging about how long Hong Kong will maintain its current currency regime.
Q: What are the implications of the yuan’s decline for China’s economy?
A: The decline of the yuan has significant implications for China’s economy, including increased investment in overseas bonds and a potential impact on the country’s trade balances.
