One country, two problems

May 23, 2011

By George Chen
The opinions expressed are the author’s own.

There’s a new problem with the “one country, two systems” policy for Hong Kong and mainland China — the appreciation of the yuan can ease inflation in mainland China but not in Hong Kong.

In Hong Kong, the former British colony that returned to Beijing’s hands in 1997, things unfortunately work the other way round.

Peter Wong, HSBC’s Asia-Pacific top boss (and widely considered the most handsome banker in Hong Kong) said at a forum in Shanghai last week that because the Hong Kong dollar is pegged to the U.S. dollar, whose value is falling almost every day, food prices in Hong Kong are set to increase as Hong Kong needs to pay more to import food products from the mainland.

Former Hong Kong central banker Joseph Yam, now a senior representative of a Beijing-backed financial academy, added that he believed the Chinese government would let the yuan rise further and relax some policy restrictions.

So, a stronger yuan is in no doubt, and food prices in Hong Kong are certain to rise.

You may not care much about Hong Kong. When big investors are keen to trade stocks and make deals in mainland China, they of course pay more attention to Beijing’s monetary policy. Hong Kong? It’s more like the naughty child of Uncle Beijing these days.

But the naughty child can be a challenging problem and it’s becoming more rebellious. One of the world’s leading financial centers, these days it is also known as a city of protests, especially at weekends. In 2012, we will see a transfer of power in Beijing as well as in Hong Kong. And we will see elections in Taiwan and the United States. What a year!

Some investors think the potential for H-shares is much greater than A-shares, but political risks for H-shares could be greater if Hong Kong loses its political stability and thereby financial stability, thanks to a stronger yuan.

And if Hong Kong becomes unstable, Beijing will become naturally nervous.

George Chen is a Reuters editor and columnist based in Hong Kong.

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