Western demand for Chinese-made products launched China as a major exporter. But now as American and European consumption is cut back due to the global economic downturn, China is making efforts to boost its domestic trade and prop up Hong Kong's ailing economy. The People's Bank of China signed a $29.3 million currency swap with the Hong Kong Monetary Authority.
Kenny Tang, head of research at Redford Securities in Hong Kong, says the currency swap helps stabilize Hong Kong and fosters trade between southern Guangdong province and Hong Kong, Macau and Taiwan.
The agreement makes available short-term funds to Hong Kong banks based in the mainland and to mainland lenders based in Hong Kong. The amount is based on the foreign exchange rate. Tang says China's yuan currently is valued higher than the Hong Kong dollar. "Mainland China's economy still outperforms the global economy during the recession. So you can see there's a lot of funds flowing into mainland China that push up the currency," he said.
Tang says in the long run the currency swap expands the base of the Chinese currency, the renminbi, in Hong Kong and helps Hong Kong become a RMB offshore banker. The swap can be extended after three years.
Tang also says the swap may help the RMB become more flexible and interactive with major international currencies.
China's currency may be strong, but its economy is faltering. China's fourth-quarter gross domestic product dropped to less than 7 percent growth from a year earlier, its slowest pace in seven years. Hong Kong's GDP also is expected to drop significantly during the fourth quarter.
After years of growth, China's exports contracted in November and December, as Europe and the United States slashed orders.
In southern Guangdong province, the government earmarked $278 million for two funds to support exporters. Guangdong will introduce measures to assist Hong Kong, Macau and Taiwan manufacturers in the province.
In another effort to align Hong Kong with the mainland, both the Hong Kong and Shanghai stock exchanges signed an agreement to coordinate products and services.
Hong Kong may be in recession for the first time in five years, yet it still wants to maintain its status as an international financial center.