Can Japan or China replace the US as the monetary anchor for Hong Kong and Macau?

Abstract

This contribution attempts to examine the relative importance of the US, Japan and China to Hong Kong and Macau, two effective dollar-based currency boards today, by evaluating the economic potentiality of Japan or China as an alternative monetary anchor country against the US. The assessment is made according to the criteria prescribed by the optimum currency areas (OCA) theory. In addition to that, a subsidiary analysis is done to evaluate in general the suitability of their fixed exchange rate regimes, regardless of the anchor country. Amidst the existing dollar linked arrangement and the rising dominance of China, significant evidence suggests that Japan, despite its lacklustre domestic conditions, might be at least as good a monetary anchor as the US for Hong Kong. In the meantime, China seems to be a more promising monetary anchor alternative for Macau. The features of Hong Kong and Macau also appear to broadly and endogenously support their fixed exchange rates, but not all the features of Macau, a HK-dollar-based currency board, are consistently symmetrical with those of Hong Kong.

Keywords:

• China
• currency board
• dollar
• exchange rate
• Hong Kong
• Japan
• Macau
• money
• US

Acknowledgements

Special thanks to Mike Artis of University of Manchester for his inspiring work and guidance during the initial stages of this author researching the topic.

Notes

1. The following account of Hong Kong's CBA experience is extracted from Gerlach and Gerlach-Kristen (2006) and the Hong Kong Monetary Authority (HKMA) website, while that of Macau is abstracted from Pao (2003).

2. In Hong Kong, several measures of money supply are compiled: M1 = currency held by public+demand deposits; M2 = M1+savings and time deposits with licensed banks+negotiable certificates of deposit (NCDs) issued by licensed banks and held by the public; M3 = M2+deposits with restricted licensed banks and deposit-taking companies+NCDs issued by restricted licensed banks and deposit-taking companies and held by the public.

3. Estonia and Brunei are chosen due to data constraints in the variables used here.