CONFIDENTIAL &
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27
Part IV
CHINA'S FOREIGN EXCHANGE LOSSES IF THE HONG
KONG DOLLAR CEASES TO BE A CONVERTIBLE
CURRENCY
(a) Extent of direct losses
29.
The main benefit to China of having a
current account surplus with Hong Kong arises because the Hong Kong dollars earned are freely convertible into other internationally-acceptable currencies and can thus be used to purchase goods and services from all over the world. If Hong Kong were assimilated
into China and the Hong Kong dollar were replaced by
the Renminbi or ceased to be a convertible currency,
much of this benefit could be lost. The following paragraphs attempt to assess the loss to China in
terms of foreign exchange earnings of such a
transition.
30.
The critical question is the extent to which the Hong Kong economy would be changed by the
transition. Fundamentally, the exchange value of the Hong Kong dollar in terms of other convertible
currencies depends on the ability of the economy to export its products and services successfully and on the belief by individuals and institutions that it
will be able to continue to do so. In broad terms,
if neither of these requirements is impaired by the
transition the loss to China is likely to be
minimal. This is because Hong Kong's present non-Renminbi foreign exchange earnings surplus which
allows it to run a deficit with China would accrue
wholly and directly to China. Indeed, if, in
addition, some of the goods and services presently
imported by Hong Kong from sources outside China were
obtained from within China after transition,
CONFIDENTIAL #B