Report | China’s yuan to erode, not end, dollar’s dominance

A study issued yesterday by the U.S.-China Economic and Security Review Commission says the yuan is likely to gain prominence over rival international currencies, the Japanese Yen, British Pound and the Euro, over the next decade.
In addition the study stipulated that, although the rise of the yuan “may slightly erode” the leading status of the U.S. dollar, it is unlikely to supplant the latter as the number one reserve currency.
Cornell University economist Eswar Prasad wrote in the report that China is likely to undertake a reform process of its financial and monetary system to “become largely open within the next three to five years.”
The elevation in status of the yuan has pulled into question whether the Hong Kong dollar (and subsequently the Macau pataca) should remain pegged to the U.S. dollar.
The peg has caused problems in the past as Hong Kong and Macau move through different parts of the economic “boom and bust” cycle out of synchronization with the U.S. economy. The dependency reduces the ability for Macau and Hong Kong’s Monetary Authorities to take the necessary steps to curtail recessionary pressures.
John Greenwood, the architect behind the pegging of the HKD, has said that the small, open economy of Hong Kong would not be stable if its currency were to float freely against others, because of large capital flows that make the SAR vulnerable to market volatility.
Yet a case could be made for both the MOP and HKD to be linked to the Chinese yuan, given the level of economic dependency both SARs face in relation to the mainland.
However, economist Prasad warned in the report that Beijing must yet enact a broader liberalization of its currency system before it can be regarded as a “safe haven” currency. Staff reporter

hkd peg provided stability

Hong Kong pegged its currency with the USD on October 17, 1983. Over thirty years ago, the decision provided stability as China and the United Kingdom initiated discussions on Hong Kong’s handover to mainland rule. Today, the two currencies remain pegged. Macau’s currency is also indirectly pegged with the USD.