Restrictions Being Loosened on Chinese Yuan Currency....

As reported in the AP, loosening rules allow both Hong Kong residents and Mainland visitors freer access to exchanging the currencies. In my opinion, these looser restrictions seem to be forming a pattern that will make the Hong Kong Dollar and Chinese Yuan a single currency in the not-so-distant future.

The Hong Kong Dollar currently is pegged to the US$ and has a nominal value of approximately HK$7.78/US$1.00. The HK$ has recently appreciated nominally to 7.75 since whenever there is a large international H-share issue, like last weeks Bank of Communications, large amounts of foreign investment enter the Hong Kong market to buy these shares bidding up the value of the currency. These flows are difficult for the monetary authority here to handle and the currency is allowed to appreciate.

The Chinese currency now trades at approximately RMB8.05/US$1.00 after having been revalued around 3% this summer. The stock of money in China is much bigger and capital flows can be much easier absorbed once China gets their financial house in order. So, therefore, it is notable that the difference between the Hong Kong dollar and the Chinese Yuan is currently now only 3.7% and this leads me to believe that it will make sense for the SAR here to drop the HK$ in favor for the Chinese RMB at one point in the intermediate future. Additionally, there is pressure to allow the RMB to appreciate and any further appreciation will bring the currencies closer together in value.

The benefits for merging the currencies are obvious. The monetary authority here still relies on an outside entity to peg the value of the currency to the outside world, it gives Hong Kong banks and edge in competing on the global stage in China's financial markets and drive local Chinese banks to become more competitive.