Analysing External Demand for the Hong Kong-Dollar Currency

Frank Leung (), Philip Ng and Simon Chan
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Philip Ng: Research Department, Hong Kong Monetary Authority
Simon Chan: Research Department, Hong Kong Monetary Authority

No 1007, Working Papers from Hong Kong Monetary Authority

Abstract: This paper estimates that about 50 ¡V 70% of the Hong Kong-dollar currency in circulation (equivalent to about $100 ¡V 140 billion), mostly in the form of high-denomination banknotes, was being circulated outside Hong Kong at the end of 2009. The large external circulation was mainly a result of increased economic integration between Mainland China and Hong Kong, with a thriving gaming industry in Macao providing an extra boost. In the near future, although economic integration will continue to expand external circulation, an appreciation of the renminbi is likely to reduce it. Simulation results from a cash demand model suggest that a gradual and orderly appreciation of the renminbi is not likely to cause large-scale repatriation of Hong Kong-dollar banknotes back to Hong Kong or pose a significant risk to domestic monetary stability. While some observers raise concerns about a potential increase in counterfeiting activity due to large external circulation, we have found that no clear relationship existed between counterfeiting notes confiscated in Hong Kong and external currency demand in recent years.

Keywords: Hong Kong; Currency Demand; Money Demand; Currency Circulation (search for similar items in EconPapers)
JEL-codes: E41 E51 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2010-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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