Hong Kong currency plays an important role before China currency freely floats. Ample foreign currency reserve, stable banking system and strong China support backed currency value

Hong Kong currency plays an important role before China currency goes international. Hong Kong dollars have relatively low exchange rate risks since it pegs with US dollars. The currency is backed by ample foreign currency reserve, stable banking system and strong China government economic support. More importantly, China currency still has foreign exchange control. Hence Hong Kong still acts as a gateway before China currency becomes an international currency that is freely convertiable.

With this background, we should understand some characteristics of Hong Kong dollars:

Pegged currency - Hong Kong currency is pegged to US dollar. Hong Kong monetary authority ("HKMA"), the de facto Central Bank, regulates the Hong Kong dollar to swing between 7.85 and 7.75. With the weakening of the US dollar, inflow of foreign investment fund and bank deposit 100% guaranteed by Hong Kong Government, currently, Hong Kong currency has consistently strengthened to stay at the upper end of 7.75 in March 2009. This means that the Hong Kong monetary authority has to inject Hong Kong dollars into the banking system to stop currency appreciate beyond 7.75 limit. The interbank offering rate consistently stay low at below 1% level. This is effectively a "money easing" policy.

Ample foreign currency reserve - Hong Kong has a foreign currency reserve of US$256.3 billion which was ranked seventh in the world. Compared with Hong Kong GDP of US$211 billion in 2009, the Hong Kong reserve level of 121% against GDP is even higher than China. The reserve level is high compared to the economy size of Hong Kong.

Stable banking system - Most banks in Hong Kong has capital adequacy ratio of 12% - 15%. More importantly, subsequent to the global financial crisis, Hong Kong government has decided to guarantee 100% Bank deposit in case of bank default. This action further strengthens depositors' confidence. People's confidence plays a key part to enhance the stability of a banking system.

China government economic support - China allows orderly flow of fund into Hong Kong economy through:

• China tourists - Hong Kong is benefited from the China government policy to allow visas with multiple visits particularly from Guangdong province and Shenzhen. Spendings of these China visitors help out the shortfall of westerners following the economic turmoil.
• China Enterprises listed in Hong Kong stock exchange - The listing of China enterprises attracted worldwide funding interested in investing into China inflow to Hong Kong.
• Global China trade - Hong Kong is serving as a gateway for China trade. Most of the China merchandises are still re-export through Hong Kong although we see that this role is diminishing. The free trade agreement with China, known as the Closer Economic Partnership Arrangement (CEPA), which applies zero tariffs to all Hong Kong-origin goods and preferential treatment in 40 service sectors.

Hong Kong is still acting as an important gateway for China. In terms of China trade and investment, there are many benefits for establishment of Hong Kong company entering China. You may contact us for establishment of your business case to ride on China economic boom.

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