A Study On The Monetary Integration Of Mainland China And Hong Kong SAR

In my thesis, I firstly pointed out that the recent trend of economic globalization and regional economic integration should not be ignored. The establishment of the Eurozone and several other high standard free-trade agreements (like North American Free Trade Agreement) brings enormous economic and social benefit. Although East Asia economic integration may be achieved in the future, China should take advantage of this trend and opportunity by initiating its first step, which is to achieve internal economic integration with the Hong Kong SAR. And when economic integration develops to a high level, monetary integration will be an inevitable issue. Considering the political sensitivity of Taiwan issue and small size of Macao’s economy (also Macao pataca is linked with Hong Kong dollar), I will only discuss about monetary integration with Hong Kong SAR. My study mainly focuses on the cost and feasibility of building a mainland-HK monetary integration, from a comparative perspective with USA. I try to find out the trend of OCA1 indexes (exchange rate volatility) in each case (mainland- HK case and HK-USA case), and provide policy recommendations based on my research results.My thesis flows as following sequences. In the beginning are the introduction and literature review chapters. After finishing the review of literature and summary of qualitative and quantitative approaches, I concluded that GG-LL model2 cannot provide us a clear cost-benefit outcome, though this model provides a good qualitative research framework. Mainland China and the Hong Kong SAR are currently at the high standard Free Trade Zone (FTA) level. Considering the characteristic of Hong Kong currency board regime and Chinese managed exchange rate regime, I quote the result of Bayoumi’s OCA index model (their research background is very similar to mine, and it is actually the best example for me to refer) to conduct a comparative analysis between HK-Mainland China and HK-USA. So given the results of expected explanatory variables, I can predict the future OCA index. It is clear that the cost of building a potential OCA between Hong Kong and USA is lower than that between Hong Kong and mainland China. However, the Chinese influence on Hong Kong dollar exchange rate has been increasing, and the OCA index of HK-Mainland China has been gradually declining. It is possible to achieve HK-Mainland China monetary integration in the future, if China is willing to learn lessons from the performances of western monetary integration and make some policy adjustments and reforms. Hence, I will discuss about my final part, which is policy recommendations.