1. Introduction There are many reasons to celebrate Macau’s economic growth which enabled Macau push up the exchange rate of domestic currency Pataca. Unfortunately, the Pataca has been depreciating rapidly the currency RMB, its largest trading partner mainland. Macau Pataca fell from 1. 03 Yuan/MOP at July 2005 to 0. 85 Yuan/MOP in April 2009. Base on the past three and half years record, we can say the falling is never reach the end. 2. Background information of Macau Pataca The Pataca has been the legal tender in Macau for almost a century.
It had originally been pegged with the Portuguese escudo at a rate of one Pataca equivalent to five escudos. In 1977, because of the sharp devaluation of the escudo after the Carnation Revolution in Portugal, Macau responded by uncoupling the Pataca from the escudo on 7 April and pegging it to the HKD 0. 3 The Macau Government had failed to set the Pataca at par with the HKD twice after the establishment of the official link. Since the late 1980s, the Macau Pataca has been pegged to the HKD at 1. 03MOP:1HKD.
The prevailing CBA requires the two note-issuing banks, the BOC and the BNU to deliver HKD to the Monetary Authority of Macau (AMCM) in return for the non-interest bearing certificates. The HKD receipts are then counted as part of the official foreign exchange reserves held in the AMCM. In 1983, the Sino-British dispute over the future of Hong Kong sparked a confidence crisis in Hong Kong. To pre-empt the weakening in confidence from deteriorating into a full-blown economic crisis, the Hong Kong Government resumed the currency board system on 17 October 1983, effectively linking the HKD to the USD at a rate of HKD7. :USD1. Attributable to the CBAs in Macau and Hong Kong, so the Pataca is indirectly linked to the USD at an exchange rate of about MOP8. 03:USD1.
3. The prospective of RMB RMB has continuously appreciated against the HK dollar. It is stable to appreciate during this year. As the result, the inflation rate increases. And the interest rate also increases. Even our domestic trade is also accept to use HK dollar, more and more domestic and foreign businesses try to adopt RMB because of the currency risk which is a gradual process that control by Chinese Central Government.
The trading between China and neighboring countries are gradual use RMB and gradually expand the areas. In order to engage the sustainable development of RMB and the economics of China, Chinese Central Government has some restrictions about RMB such as the exchange amount, the gradual appreciation of RMB, the stabilization and so on. Since 2005 China announced to keep RMB gradual appreciation. RMB also has some policies to accelerate internationalize because of the large amount of foreign debt. However, Chinese Central Government still adopts action to intervene between RMB and foreign currency and control the appreciation.
However, the intervention has its drawbacks. RMB appreciation prospects under persistent and consistent under the foreign pressures there are many potential problems may arise. Like other fixed exchange rate systems, currency boards prevent governments from setting their own interest rates. For example, Hong Kong’s interest rates are in effect set by the Federal Reserve in the US. Since its inflation rate was higher than that in the US in the 1990s, this resulted in low and sometimes negative real interest rates. Form the table we can see the interest rate volatility is very high.
Moreover, the weaknesses could be the flip side of their strengths. While the commitment to preserving the parity is an asset of currency instability, it can become a liability in the presence of large exchange rate misalignments. This risk can be particularly serious because it is difficult to have any prediction of what the appropriate exchange rate should be settled. While the government setting the exchange rate at an appropriate level, a more flexible exchange rate regime would enable to correct some of the early errors without incurring the costs of credibility loss. 4. The prospective of HKD
Focus on the implications for the economic role of the Hong Kong dollar, rather than its legal status. The developments raise the question of whether the role of the HK dollar will be marginalized by the RMB. In the foreseeable future, RMB will replace the Hong Kong dollar to any significant extent in domestic transactions within 50 years. However, the role of the Hong Kong dollar is likely to remain significant for now, not only because of its legal tender status but also its use for tax and other official payments. In recent years, HK face a serious inflation period during the depreciation to RMB.
The table below indicates that the real deposit rate is below zero again after the great depression period thirty years ago. Moreover, the housing prices keep increasing sharply which make the situation even worse. Will HK dollar be marginalized by the RMB in the further? Next part we will discuss about the reality of this replacement. 5. The analysis of whether Macau MOP should shift currency peg form HKD to RMB From Macau Pataca should peg with RMB point of view: As we mention above, the RMB has been increasingly accepted for retail shops in Macau in recent years, reflecting the increasing numbers of Mainland visitors.
The factors including deposits, exchange services, remittance and credit card services will lead to increase in the use of the RMB in Hong Kong, in part by reducing the transaction cost. In recent months, there are many progresses to establish closer relationship between Macau and the Mainland includes zero tariffs for Macau exports to the Mainland. While some short term adjustments are needed for both parties, the agreement will bring long term benefit to and accelerate the economic integration between the Mainland and Macau.
As Mainland China continues to work closely with Macau under the principle of “one country, two systems”, why not peg the Pataca to the RMB which is more convenience and save for the transaction costs. Macau’s economic cycle is much more connect with the Mainland and almost opposite to U. S. economy, so to peg currency indirectly to USD is giving up the financial tools, such as interests rates, for stimulating or stabilizing our economy,” the scholar Fong Ka Chio said. From Macau Pataca should peg with HKD point of view: 50% of deposits and domestic credit and 70% of check in Macau Clearing House Fee are repaid in Hong Kong dollars.
In order words, HKD is widely used for payment in wages and other domestic transactions fee such as property transactions and rental payments. The wide circulation of the Hong Kong dollar in Macau is not only due to high inflation, but also associated with the social environment. Macau economic relies heavily on tourist industry and gambling industry. The net exports of services take part in half of GDP. The use of the Hong Kong dollar involves minimal exchange rate risk under the fixed exchange rate. So most of paying wages and rentals or even buys a mobile phone are count by the Hong Kong dollar.
Hong Kong dollar involves a positive externality for investing in Hong Kong. Schwartz (1993) argues that the choice of an exchange rate peg is complicated because the reserve-currency country might not be one of the currency-board country’s closest trading partners. A change in the exchange rate of the reserve currency might alter the currency board country’s competitive position relative to its major trading partners. If inflation in the country with currency board remains higher than that of the country to which the currency is pegged, the country with currency board can become overvalued and uncompetitive.
Form the discussion above, we have 5 points to support use of the Hong Kong dollar for domestic transactions, and it is unlikely to be replaced in the foreseeable future: 1) The stable value of the Hong Kong dollar, which is backed by the US dollar, and its full convertibility provide a solid basis for its continuous use in Hong Kong. 2) As most domestic prices are likely to continue to be denominated in Hong Kong dollars, it provides a natural hedge against any potential change in the exchange rate between the RMB and HKD. Since 1977, the Pataca has been pegged to the Hong Kong dollar at the rate of 1:1. 03. ) The cost in HKD transactions is likely to remain lower than for the RMB since RMB is keep appreciate to HKD every day. 4) Macau has a close economic and financial relationship with Hong Kong.
Over 40% of visitors come from Hong Kong because mainland restricts their citizens to go to Macau. So a large amount the earnings are denominated in Hong Kong dollars. 5) Around 70,000 Macau-born citizens live in Hong Kong which is represent 16% of Macau’s population. 6. Conclusion The portfolio demand for RMB deposit holdings is largely determined by risk-return considerations, including interest rate differentials, xchange rate expectations and the switching between the RMB and the Hong Kong dollar. The expectation of an appreciation of the RMB may earn some short-term interest but HKD will still be the major exchange currency. Macau scholar said the Pataca is most likely to remain directly pegged to HKD or indirectly pegged to USD. But for the long-term, RMB will take the USD’s role. Because the Mainland currency is still not a freely convertible currency which is not international and it would increase Macau’s international trading.
Fong Ka Chio, Vice-President of the Macau Development Strategies Studies Centre states that pataca should retain its status quo, but in the long-term, he bet on RMB as the final goal for a peg: “Currently MOP, RMB and HKD are used in Macau, but there is no such example any other place in the world, even in Europe they have to invent the Euro, we can’t spend different currencies for long, this kind of mechanism is simply not sustainable. ” He believed the Macau monetary authority should closely coordinate with Beijing for a possible currency link in the future. ataca should retain its status quo, but in the long-term, he bet on RMB as the final goal for a peg: “Currently MOP, RMB and HKD are used in Macau, but there is no such example any other place in the world, even in Europe they have to invent the Euro, we can’t spend different currencies for long, this kind of mechanism is simply not sustainable. ” He believed the Macau monetary authority should closely coordinate with Beijing for a possible currency link in the future. Pataca should retain for now, but in the long-term, he bet on RMB as the final goal to peg.
Reference
www.dsec.gov.mo/e_index.html.
http://www.macaudailytimes.com.mo/macau/36609-according-to-the-vice-president-of-the-macau-development-strategies-studies-centre-macau-better-remain-at-a-pegged-rate-for-the-time-being.html
