Special report – A monetary union?

Will the Greater Bay Area move toward a unified monetary system in the near future? The idea has been floated, but experts think it will take time, with one scientist suggesting at least 20 years

Macau Business | April2024 | Special report | Modern finance

A common currency or an exchange rate mechanism are hallmarks of highly integrated economies. As the Guangdong Hong Kong Macau Greater Bay Area (GBA) is set to make significant progress in integrated development, questions arise about the future interdependence of the three currencies used in the three regions (yuan, Hong Kong dollar and pataca).

“I believe that ‘monetary unification’ will happen in the long term (e.g. in 20 years),” said Jacky So, chairman of the School of Business at Macau University of Science and Technology (MUST) and one of the leading scientists . respected voices locally in the financial field, to Macau Business.

“By then – Professor So continues – ‘capital controls’ will no longer exist in China and Macau and Hong Kong will both have become part of China.”

However, as the same Macau-based scholar admits, “if for some reason China can still benefit from the fact that Hong Kong and Macau are international cities, it may want to continue the ‘three currencies’ practice. In other words, it may be politically ‘inevitable’ in the long run. However, economically it may not be ‘inevitable’.”

Emil Marques, senior lecturer at the Faculty of Business and Law of the University of Saint Joseph, also understands that this could happen in the long term “for the efficient integration of the GBA”. However, he explains Macau Business“I believe there are more advanced ways of financial inclusion that may be more realistic to simplify the financial integration of the GBA through the use of digital currencies and automated clearing systems through the advancement of fintech” or even “the recent ability to use the MPAY system on the continent and in a number of different countries.”

Professor So explains: “Indexation already takes place through fixed exchange rates set by governments. The only difference could be that Hong Kong will give up its ‘currency board’ system and China will follow to use a ‘managed float or free float’ exchange rate regime. As mentioned above, this may be necessary due to longer-term economic developments.”

However, the former Research Fellow of the Hong Kong Institute of Monetary Research also admits that another scenario is likely: “For political reasons (and/or economic reasons), China will prefer a common currency system: the RMB.”

“However, the change may come at a cost for China: give up capital controls and the RMB will be convertible without government intervention. If this is not acceptable to China, it may be better off to continue the current practice: Hong Kong and Macau can be its international arms to reach the world with convertible currencies,” said Professor So.

As a professor of international finance, the MUST scientist also thought about the costs and benefits of this hypothetical change:

“Standard international economic theory tells us that the government generates ‘inflation taxes’ to avoid a budget deficit. ‘Currency substitutes’, which use three currencies in Macau, can be used to avoid such taxes by paying a price: the transaction fee. So it can benefit the wealthy who can afford the transaction costs of holding foreign currency or foreign bonds. The poor who cannot afford the costs may have to stick with the local currency, which could depreciate due to inflation, and pay the taxes.”

“Fortunately – concludes Jacky So – only expensive items such as cars and apartments, and luxury goods such as casino games, are denominated in foreign currencies, and not daily necessities. Therefore, the prosperity desperation of low-income families is not really too great. It could also explain why the government is keen to ensure ‘price stability’, which is necessary for harmony and social stability.”

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