Hong Kong is a south-facing Chinese window on the West. The island (which is more than an island) represents the reasonable hope that mainland China will become an entirely normal member of the international commercial and financial community. This month, though, the International Monetary Fund's staff report on the China concluded that the renminbi, the Chinese currency - undervalued by somewhere from 3 per cent to 23 per cent - has actually fallen in the past year.
While the powers that be in Beijing drag their feet on revaluation, Hong Kong keeps taking new steps - with the approval of Beijing - to give the renminbi an increasingly normal life as a tradable, convertible currency, although the special administrative region has no intention of ceasing to use the Hong Kong dollar as its own currency - as John Tsang, Hong Kong's Financial Secretary, told The Globe's editorial board this month.
At the end of June, Hong Kong established a mechanism to clarify the daily exchange rate between the U.S. dollar and renminbi, essentially by locating the median value for the day and calling it the benchmark - thus facilitating both commercial and financial transactions, much as if the renminbi were not subject to exchange controls.
The IMF found that, though the settlement of international trade transactions in renminbi has grown by leaps and bounds - above all in Hong Kong - this trend is lopsided; it applies much more to imports than to exports, apparently because of capital controls. And though the "onshore" Chinese spot currency markets have come to exercise a prevailing influence over their "offshore" Hong Kong equivalents, the IMF says that Hong Kong's forward markets are good at predicting what the mainland markets will do. Meanwhile, the trading in Hong Kong of so-called "dim sum" renminbi-denominated bonds has been rising quickly.
Mr. Tsang made clear that Hong Kong is happy with its role as the economic laboratory for a China that will eventually have a fully convertible currency. It is a noble, as well as profitable, service to the international economy.
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