In time, most currency pegs and currency board arrangements for well advanced developed economies ultimately dissolve. For China, they are now the second largest economy in the world only behind the United States. Of interest, is that the Chinese yuan follows a managed crawling peg to the US-dollar (USD) with a current trading value of 6.2 CNY to the USD. Five years ago, this trading value was at 6.82 CNY, so the Chinese yuan has modestly appreciated to the USD during this time.
Conversely, Hong Kong dollar (HKD) has a thin trading band currency peg to the USD in a trading range of 7.75 to 7.85 HKD to the USD. The implications for a currency board arrangement for Hong Kong is that it has imported America's low interest rate structure thus resulting in sky high real estate valuations in Hong Kong.
Currency policy can have significant impact on a great number of people in the world today. Only have to look at Greece and Venezuela, case in point.
Misguided currency policy can contribute immensely to Hong Kong's very expensive real estate which which has priced a great number of citizens out of the market. The social implications are tremendous as it has resulted in protests as the world has noticed over the last couple of years with thousands of Hong Kong residents participating in the 'umbrella' sit it.
What's next for both Hong Kong and China's currency?
Purchasing power parity suggests the Chinese currency is approximately 40 percent undervalued to the USD whilst the Hong Kong dollar is 50 percent undervalued. A revaluation of the currencies is imminent but when?
Our best educated guess is likely somewhere in the year 2017 time frame when the Chinese yuan / renminbi currency becomes fully convertible - projected time line. At this time, Hong Kong would be more inclined to give up its USD peg and either re-peg to CNY or perhaps freely float the HKD.
With significant increased capital flows and trade between Hong Kong and China, it is inevitable the USD peg is near the near the end of its story, particularly for Hong Kong with its 32 year love affair with American money.
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