Overcoming Chinese Monetary Division and External Anchoring in East Asia

Abstract

There are few recent historical precedents for maintaining the high degree of separation that still prevails between the internal monetary arrangements of Hong Kong and mainland China. This paper explains why this separation is likely to erode and considers the economics of the different forms that monetary unification of China could take. It argues that achieving such unification without resorting to capital controls or expropriation is a precondition for developing a second major international currency in East Asia that would rival the yen. Until the renminbi has been established as an international currency within a unified and sound financial system that has achieved Hong Kong's current standards, there can be no progress toward a regional monetary union in East Asia. An internal goal of Chinese monetary union is banking reform and financial integration, and an external goal is to help emancipate both China and East Asia as a whole safely from the U.S. dollar standard.