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Economist - 8 Feb 1930
HONG KONG.-CURRENCY_SITUATION-DIVER- generally had been speculating upon an early return to a SION OF TRADE TO SHANGHAI—PRICES LEVEL. (FROM OUR CORRESPONDENT.)
HONG KONG, December 21. THE currency of Hong Kong is in a curious position and the developments of recent months have given rise to a problem for which no satisfactory solution has yet been found. The legal tender of the Colony is the silver dollar, either British or Mexican, but for all practical pur- poses the coinage has been supplanted by the notes issued by three of the foreign banks established here. These notes circulate throughout South China, and by reason of their portability and their unquestioned back- ing they have been in increasing demand, especially of recent years, when incessant civil warfare has rendered the currency of the neighbouring provinces more and more unreliable. The coincidence of this demand with a shift- ing balance of trade between Hong Kong and South China resulted in the notes acquiring a greater value than the silver which they represented, and a few months ago they rose to a premium of nearly 20 per cent. above their par value. For many years past the banks of the Colony have declined to receive silver dollars except at the ruling rate of discount vis-à-vis notes, and all financial transac- tions, including payment of Government taxes, have been subject to payment in bank notes. Invisible exports, especially remittances from overseas Chinese, play an important part in the trade of Hong Kong, and with a marked decline in imported manufactures from gold-using countries, the local banks have had the utmost difficulty in obtaining cover to meet drawings from centres inside China. Owing to this lack of cover the banks maintained the rate of exchange at a higher level than the parity of bar silver and were protected in so doing because the import of silver bullion was impracticable so long as the currency of the Colony was on the basis of the bank note.
The steady rise of the Hong Kong dollar in relation to the currency of South China is believed to have diverted a good deal of business from Hong Kong to Shanghai, where the currency has been kept in close relationship with the fluctuations in the price of bar silver. A Canton merchant wishing to buy a case of piece goods found that he would have to pay from 10 per cent. to 15 per cent. more in Hong Kong than he would in Shanghai for the very same cloth. Moreover, in Shanghai there were still stocks of goods imported before the new Chinese Customs tariff came into force early in the present year, and such goods could be shipped to Canton without paying further duty. Goods from Hong Kong, on the other hand, would be subject to the higher scale charged under the new tariff, and despite the extra freight from Shanghai there was undoubtedly an appreci- able advantage in purchasing from Shanghai rather than from Hong Kong. In the case of the exporter from South China, his produce would yield more in Shanghai by reason of the lower level of sterling exchange. The very existence of Hong Kong depends upon its ability to handle trade between South China and the outside world, as well as between South China and the other provinces. When, therefore, it became apparent that business was being diverted the Chinese Chamber of Commerce, at a meeting held in September, asked the Government to intervene with a view to bringing back the Hong Kong dollar to parity with silver. As Chinese merchants
normal rate of exchange for Hong Kong notes, the appeal to Government was by no means disinterested. A few weeks after the appeal was made rumours of Govern- ment action brought out a big demand for sterling and within a few days the rate of exchange dropped from 1s. 11 d. to 1s. 91d. On October 24th the banks of the Colony announced that they would "receive and pay out Mexican and British dollars on the same basis as the notes of the issuing banks.' With the rate as 1s. 9d. it was profitable to import silver dollars, which could be laid down at about 1s. 8d., and there was a rush to the Royal Mint in London and to the Bombay Mint where British dollars are also coined. During the past week or two silver dollars have been steadily arriving in the Colony and there are large quantities en route.
The influx of this specie will not affect the demand for notes, which are still at a premium, because silver dollars are no longer acceptable in the hinterland. All that will happen, so far as one can see, will be a steady accumulation of silver dollars in the vaults of the banks until the rate of exchange falls to the point where it no longer pays to import silver. The demand for notes will, presumably, continue. At present the Colony's note cir- culation exceeds $70 million and the issuing banks have no inducement to increase their note issue, for in addition to the cost of printing, registration and loss of interest there is an annual tax of 1 per cent. The Government are at present considering the removal of this tax, at any rate in respect of circulation in excess of the normal figure, and if they decide on remitting the tax the banks will be in a position to issue notes freely, thereby releas- ing the currency from an artificial situation. While un- certainty as to the future of the tax on circulation pre- vails, the banks are reducing their exchange operations to a minimum, for with the import trade practically at a standstill, owing to the political struggle in the neighbour- hood of Canton, there is no cover to set off against the purchase of gold currencies, or in other words there is no counter-balance to the incessant demand for Hong Kong notes.
There have been previous occasions when the Hong Kong currency has required adjustment, but probably none which have been marked by such acute trouble as the present crisis. The chaotic conditions prevailing in South China are, of course, largely responsible and it is to be feared that a recurrence of the trouble will always be possible so long as the currency of the hinterland lacks any firm basis. The only satisfactory remedy is the adoption by China of a gold currency, but although Dr. Kemmerer is reported to have pressed this remedy upon the Nanking Government there seems little prospect of its being accepted. Hong Kong is, therefore, faced with the problem of acting as the intermediary between the gold-using countries of the world and an already sorely impoverished territory, whose people are called upon by the continued fall in silver to meet an advance of 15 per cent. in the price of foreign manufactures. The import trade of this Colony has never properly recovered from the boycott of four years ago and is therefore in no fit condition to bear the extra burden thrown on it by the drop in sterling exchange. There seems little hope of a recovery in the price of bar silver and every possibility of a further decline, so that there is nothing for it but to adjust local prices to the new level of exchange. Such adjustment in a time of financial depression means a severe curtailment of demand and the diversion of trade from those lines where quality counts and has to be paid for.
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