Would a stronger Hong Kong dollar pull down growth?

Let's look at the cost.

In relation to the Hong Kong economy, this question has been asked: How much of a drag on growth is a stronger Hong Kong dollar?

According to a research note from Hang Seng Bank, it believes the impact on the Hong Kong economy will be noticeable but not overwhelming.

A 10% rise in the real Hong Kong dollar exchange rate will, on average, suppress service exports by about 4.4 percentage points, the report said.

It will also take about 0.4 percentage points off Hong Kong GDP over the course of a year.

Here's more from Hang Seng Bank:

In order to add up all the currency movements, we looked at Hong Kong’s tradeweighted real effective exchange rates. The Hong Kong dollar has been one of Asia’s best performing currencies over the past year, surging 15.6%1 since its most-recent low in the summer of 2014. Many observers are asking how the economy will be affected by this stunning appreciation of the Hong Kong dollar.

Accurately estimating the impact of a rising currency is conceptually straightforward but enormously difficult in practice. First, it is hard to separate out other closely linked factors such as sliding oil prices and feeble demand in emerging economies.

Second, import intensity is another prime determinant of exchange rate pass-through. Where the import content of exports is high, domestic exporters can enjoy a gain from lower costs of imported goods and pass-through to export prices. Third, exporting firms tend to adjust their mark-ups to blunt the impact of currency appreciation.

Last, invoicing practices could also play a role. If Chinese producers invoice their exports in US dollars, an appreciation in the US dollar will cut the profits of Chinese producers but will not increase the dollar price paid by US importers.

Given these considerations, it is not surprising that the correlation between Hong Kong’s exports and the exchange rate is rather loose. In order to better understand the causal relationship between different factors, we extended our general equilibrium model3 that allows us to trace the impact of a ‘shock’ in the exchange rate on exports over time.

After controlling for the weighted demand of Hong Kong’s trading partners, the model results suggest that re-exports of goods, accounting for over 73% of Hong Kong’s total exports, are largely uninfluenced by fluctuations in Hong Kong’s real effective exchange rate. We believe one reason for this interesting finding is that the high import content of Hong Kong’s re-exports mitigates the adverse effect of a rising dollar by making imported intermediate inputs cheaper.

That does not, however, mean that the economy as a whole is completely unaffected by exchange rate fluctuations. Based on our analysis, trade in services is much more sensitive to the real exchange rate than trade in goods.

A 10% rise in the real Hong Kong dollar exchange rate will, on average, suppress service exports by about 4.4 percentage points. Analysis by the Hong Kong Monetary Authority used a different modelling approach, but calculated much the same effect. Of note, the impact of the strong dollar not only reduces the attractiveness of Hong Kong to tourists but also to locals.

A thorough analysis requires a potential leakage of local purchasing power into higher overseas spending to be taken into account. Overall, we estimate that the combined impact of the dollar appreciation since last summer will take about 0.4 percentage points off Hong Kong’s GDP over the course of a year. The takeaway point in all this is that the impact of a strengthening dollar on the Hong Kong economy will be noticeable but not overwhelming.