Last week, a new type of free trade zone in Shanghai, China, was announced to open. It is an experiment in economic and financial reform on mainland China. In this restricted area, banks and other organizations are allowed to do something that is tightly controlled in China, including eased regulation of interest rate and freer convertibility of China's currency, the yuan. The more frequent fluctuation of yuan may affect Chinese import and export price of products. But what is the impact on Hong Kong which is located to the south of mainland China.
Hong Kong is known as the financial and transfer center in Asia. The free trade zone in Shanghai may compete with Hong Kong in financial operation and investment because Hong Kong was the first place to conduct offshore yuan business. But Hong Kong has its own advantages such as geographic position and mature financial regulation. I think it is not easy to use what we learn in classes to describe the impact of Hong Kong in this area. But I want to talk about the impact of the TOT on Hong Kong.
We can see from the second link that mainland China is the largest trading partner of Hong Kong. Hong Kong exports 54.3% and imports 47.1% of its goods with China. We assume that Hong Kong exports manufactured products to mainland China and import consumer goods from mainland China. Thus, the TOT of Hong Kong is equal to the price of manufactured products over the the price of consumer goods. The impact from the free trade zone in Shanghai involves the interest rate and the value of the yuan. I think these two factors may not affect much about the price of manufactured products and consumer goods because the government of China will try to keep the interest rate and the value of yuan stable in the short term so that China is able to maintain a steady economic growth. In the long term, I think the value of yuan may increase gradually which may have impact on both manufactured products and consumer goods. I pose a question here, what is the impact of TOT on Hong Kong in the competition against the free trade zone in Shanghai in the long term?
In my opinion, the terms of trade in Hong Kong will be worse in the long term. As time goes on, the financial system and the investing environment in Shanghai will be better and better, which can attract more Chinese consumer goods flow to this free zone. Also, because there will be few restrictions, the prices of products will decrease. Thus, Chinese will buy things from here. For Hong Kong, it should reduce the prices of exports so that it can compete with Shanghai and continue to export many manufactured products to mainland China. Meanwhile, people from mainland will sell more products to Shanghai. If the quantities of products will not be changed a lot in the long term, the products exported to Hong Kong will go down. Therefore, Hong Kong should raise the prices of imports to get enough consumer goods. With the decline of export price and the increase of import price, the TOT in Hong Kong will be worse, which make Hong Kong worse off. So Hong Kong needs to take some measures to enhance competitiveness and maintain its advantage.
ReplyDeleteA couple of things could happen here. If Hong Kong does not react fast enough then Shanghai will be able to offer competitive business for firms and investors leading to a growth of industry. With the growth of industry we see more manufacturing at cheaper prices due to deregulation of export and import regulations. This would increase Shanghai's terms of trade. Though if Hong Kong could react fast enough with economic measures and with its current infrastructure to handle free trade already in place, Shanghai may not have enough incentive to move firms out of Hong Kong.
ReplyDelete