Renminbi appreciation may reduce HK dollar demand

The European debt problems and Mainland's policy tightening might cause some slowdowns in HK economic growth.

A gradual and orderly appreciation of the renminbi might reduce the external demand for Hong Kong dollar banknotes, but the magnitude would not be large, according to the minutes of the Exchange Fund Advisory Committee Currency Board Sub-Committee's meeting, according to a government report.

The sub-committee noted a paper estimating the amount of Hong Kong dollar currency, mostly in the form of high-denomination banknotes, circulating in Mainland China and Macau had reached $100-140 billion, mainly reflecting increased economic integration between the Mainland and Hong Kong.

In the event that the continued appreciation of the renminbi led to a repatriation of the banknotes back to Hong Kong, the effect on the Hong Kong dollar exchange rate and interest rates would be minimal.

Economic outlook
The sub-committee noted financial strains in Europe are likely to continue, with a confluence of sovereign and bank risks weighing on global financial stability.

Economic recovery in the US has slowed. The austerity measures introduced by the governments in Japan, the UK and some European countries have added uncertainties to the economic outlook. Europe's financial problems could also dampen global demand.

Growth momentum on the Mainland is likely to moderate in the coming months. While inflationary pressures were expected to ease, the current macroeconomic policy stance was likely to be maintained.

HK's situation
In Hong Kong, economic growth had likely slowed in the second quarter. Downward pressures on external demand would persist, and concerns about sovereign risks in the euro area would continue to threaten financial market stability.

The sovereign debt problems in the euro area and the Mainland's policy tightening might cause some slowdowns in the economic growth in 2010. Inflationary pressure might surface on renewed capital inflows into the Asian region in view of its better growth prospect relative to the advanced economies.