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Stronger yuan could burden the poor with higher food prices: Tsang

Financial Secretary John Tsang said any sudden increase in the value of the yuan would risk hurting Hong Kong's exports and triggering inflation, which would undermine the living standards of residents, particularly the low-income group in the city.

"Drastic appreciation of the yuan may undermine competitiveness of our exports and push up inflation. Some companies in Hong Kong have been subjected to greater cost pressure since mid-2005, during which time the yuan has appreciated by over 20 percent against the US dollar in an orderly manner," Tsang told lawmakers at the Legislative Council Wednesday.

Tsang said although the city's economy as a whole has adjusted rather well to these changes over the years, he nevertheless worries that the rise in food prices resulting from climate changes and exchange-rate movements may lead to a rise in inflation later this year.

Tsang expressed deep concern about the impact of inflation and, specifically, rising food prices on low-income people. But he pointed out that the government has already announced a series of relief measures, such as waivers of public housing rent and additional social security allowance payments to protect people's livelihoods, adding that the government will closely monitor the impact of inflation.

Mo Pak-hung, associate professor of economics at Hong Kong Baptist University, said as Hong Kong has separately pegged its dollar to the American currency since 1983, the yuan's appreciation would weaken the Hong Kong dollar's purchasing power vis-a-vis goods imported from the mainland.

"To low-income residents in Hong Kong, a stronger yuan will make their living even harder, since the city is importing a great deal of daily necessities from the mainland," said Mo.

Mo said that, in theory, the yuan's strengthening will also affect mainland exports via Hong Kong to overseas markets, as the rising prices of goods would potentially curb demand abroad.

However, he added, "as the global economy is revitalizing and demands from Europe and the US are expected to further pick up, I think a gradual appreciation of the yuan in the year would not harm the city's exports substantially."

Secretary Tsang believes China will "take forward reforms" in the yuan's course in light of the evolving global economic situation and the development of the mainland's domestic economy, in a progressive manner so as to avoid undue fluctuations.

"The strengthening of the yuan will boost consumption in the city, particularly the mainland visitors' spending here in Hong Kong," said the Financial Secretary.

HSBC earlier this year predicted the pace of the yuan's appreciation will in all likelihood be much slower than in previous years, about a 3 to 4 percent increase on an annualized basis in 2010.

China Daily

(HK Edition 04/22/2010 page1)