Purity in money

In Shenzhen, there have been local reports that Chinese mainlanders hoping to make it big in Hong Kong have been withdrawing Hong Kong dollars from their local banks and “backpacking” the money across the border. As a result, unsurprisingly, Beijing is keen to stamp down on withdrawls of the Hong Kong currency on the mainland.

What is notable about this is that you don’t need to stop passing Hong Kong dollars off in China to stem this tide. There is a solution, which the South Americans and the USA alike are only too familiar with. One other way to create a basket of regional currencies and peg them to the Hong Kong dollar, in that way, creating two classes of HK dollar – one intrinsic and one artificial. This would satisfy recent comments by the U.S. about the rise of the yuan vs. other global currencies, at the same time as eliminate the need for swaps, making equity purchases easy to track.

While this may sound far-fetched, economically it would work very well. The question is whether the strategy would hold up politically – but then again, currencies are best managed when they are not managed politically, as the war in Iraq has shown only too well.