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HKD has a limited future according to a London Business School survey

06 Apr 2016

RMB to be a serious currency contender in 10 years or less

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The majority of business executives in China and Hong Kong expect the RMB to become a serious contender to the EUR, GBP, USD and JPY in 10 years or less, according to a new survey by London Business School in partnership with University of Hong Kong. 62% expect the HKD to be phased out eventually. 

It has been predicted that by 2030 the RMB will become one of the top three major international currencies, together with the dollar and the euro. 84% of executives surveyed expect the RMB to be a serious contender in 10 years or less. Meanwhile, Hong Kong’s ‘one country-two systems’ arrangement has long led to speculation about the fate of the HKD.

The survey of 225 Chinese and Hong Kong business executives conducted by London Business School in partnership with University of Hong Kong, explored the future of the RMB and HKD, and revealed that more than two fifths (41%) of respondents expect the RMB to be viewed as a serious currency contender in five to 10 years. A further two fifths (39%) anticipate it will be a serious contender in less than five years, and 4% believe this will happen straight away. 

Linda Yueh, Adjunct Professor of Economics, London Business School, said: “Public and private demand for holding the RMB, just as the dollar and euro are being held, will determine the speed of the ascension of the Chinese currency.”

More than half (58%) of executives believe that there should be more widespread acceptance of the RMB in Hong Kong shops and leisure outlets, for reasons that include the region’s reliance on tourists from Mainland China and decreasing currency transaction costs.
 
However, despite support for the RMB – a little more than two fifths (21%) said that they prefer RMB – the HKD is still the most popular currency among executives, with more than three fifths (62%) of respondents preferring HKD for transactions. Respondents felt comforted by the stability of the HKD, its peg to the USD, the ease to freely exchange and the lack of foreign exchange limit.

Commenting on the findings, Linda Yueh, Adjunct Professor of Economics, London Business School, said: “At the moment, Hong Kong has a more transparent and better established institutional basis supporting its currency, while China is still undergoing financial liberalisation. Therefore, the HKD would be preferred, especially as some respondents noted that the Chinese RMB remains limited in its convertibility so there is some way to go before it can be freely used and traded.”

However, the preference for HKD transactions is set to turn, with the majority of respondents expecting a limited future for the currency as the RMB grows in popularity and usage. More than three fifths (62%) of executives expect the HKD to be phased out eventually. Three quarters (75%) of respondents said this would be met with disappointment, for economic and sentimental reasons, including loss of political independence and the stability of Hong Kong as a financial centre. 

“It’s interesting that most respondents see a limited future for the Hong Kong dollar as the RMB gains in time”, explains Adjunct Professor Linda Yueh. “In one sense, the ‘one country-two systems’ arrangement for Hong Kong will eventually come to an end, so that would mean the end of a separate currency in any case. Whether it’s good or bad for the economy of Hong Kong will depend more on how the structure of the economy is rather than just the currency.” 

In the meantime, with the recent decline in China’s currency, respondents said they expect the devaluation of the RMB to have knock-on effects on Chinese investment in property overseas, with 82% anticipating an impact of varying degrees.

More than 200 members of the London Business School and University of Hong Kong communities, including alumni, Executive Education alumni and past participants, EMBA Global-Asia students and London Business School’s China Club, participated in the survey, sharing their views on the future of the RMB and HKD.