Possibility of Monetary Integration between Mainland China and Hong Kong

Abstract

After Hong Kong returned to Chinese sovereignty in 1997, it keeps its own currency under the One Country-Two System policy. Recently, there are increasing economic ties between the two economies. Polices like the Closer Economic Partnership Arrangement (CEPA) and the Shanghai and Hong Kong Stock Connect were introduced. The Chinese government also announced that it will speed up the internationalization of RMB. As the economic ties between the two economies are getting closer, the purpose of this paper is to examine the possibility of monetary integration between Hong Kong and mainland China. In this research, Optimum Currency Area theory is used to test the criteria of forming a monetary union between Hong Kong and mainland China. As China has high economic diversity, comparison on economic integration is made between three main economic regions (Bohai Economic Rim, Yangtze River Delta Economic Zone and Pearl River Delta Economic Zone) in mainland China and Hong Kong. The result of this research found that there are different levels of economic integration between economic regions in China and Hong Kong. The Pearl River Delta has the closest economic relationship with Hong Kong compared to other economic regions in mainland China and has the higher possibility of forming a monetary union with Hong Kong. However, the trade dependency of mainland China on Hong Kong is decreased by time. For further economic integration, there needs to be other kinds of cooperation between the two regions.