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~------------------------------~ The Impact of Renminbi Devaluation on Hong Kong and China Trade Kui-yin Cheung INTRODUCTION Since China launched its economic reforms and adopted the open-door policy in the late 1970s, it has become a significant factor in world trade. From 1979 to 1993, China's exports increased from US$13.7 billion to US$91.8 billion at more than 16 percent per year, a rate that would have been inconceivable before the adoption of the open-door strategy. As in other centrally planned economies, the price of foreign exchange had little effect on the volume of either imports or exports. In the pre-reform era, China's exports were used to earn enough hard currency to import goods for industrialization and self dependence. Thus, the exchange rate was largely a passive policy instrument in the formulation of its trade policy. In addition, China's exchange rate was highly overvalued and the resulting excess demand for foreign exchange was handled through a rigid system of exchange control. Even in the post-reform era, the domestic currency cost of earning foreign exchange was continually and persistently higher than the official exchange rate, making most exports financially unprofitable, particularly manufacturing goods which were usually sold at a financial lossY Since 1980, the renminbi (RMB) has experienced substantial depreciation against major currencies. From 1980 to 1992, the renminbi devalued by 74 percent versus the US dollar, 85 percent versus the Japanese yen, 71 percent versus the ECU (European Currency Unit) and 60 percent versus the Hong Kong dollar.3 The devaluation of China's exchange rate was, without doubt, intended to promote exports and to restrain imports so as to improve China's current account position. This includes the RMB devaluation of 13.6 percent in July 1986,4 21.2 percent in December 1989,9.57 percent in November 19905 and 33.4 percent in January 1994.6 In particular, the RMB devaluation in 1989 and 1990 helped China to move from a current account deficit of US$ 6.6 billion in 1989 to a current account surplus of US$ 8.12 billion in 1991. China's open-door policy has not only intensified the trade relationship between Hong Kong and China, but also revitalized Hong Kong's traditional 164 Kui-yin Cheung entrep6t trade which was once active some thirty years ago. Since 1980, Hong Kong and China have become each other's most important trade partner. Table 8.1 shows the estimates of the average annual rate of growth in bilateral trade between Hong Kong and China from 1980 to 1991. From 1979 to 1993, Hong Kong's domestic exports to China grew 66 times and in 1993 were estimated to have reached US$8116 million. During the same period, Hong Kong's imports from China grew drastically as well and in 1993 were 17 times those in 1979. The majority of these imports from China, however, are for reexport and are of outward-processing in nature. The re-export portion of imports grew rapidly and exceeded the retained portion by 1986. The share of imports of Chinese products re-exported via Hong Kong to total imports from China rose from 24.7 percent in 1977 to 87.1 percent in 1993. This highlights the growing importance of the outward-processing trade between Hong Kong and China. In fact, exports of sanzi enterprises in China, particular in the Pearl River delta region of, Guangdong, through Hong Kong have indeed become so substantial that in the last few years they have been the focal point of USChina trade disputes, with the Chinese arguing that when calculating its trade surplus with the United States these 'outward processing' activities7 from Hong Kong should not be taken into account since the Chinese partners earn only a minimal share of the processing fees. Table 8.1 The Average Annual Growth Rate (%) of Hong Kong and China Trade HK imports from China HK exports to China Period Total Retained Re-exported Total Hong Hong in elsewhere Kong Kong Hong Kong goods Re-exports 1980-91 23.57 8.96 28.76 31.86 32.03 31.79 1980-85 19.76 14.38 28.34 45.65 44.95 45.88 1985-91 26.74 4.44 31.83 20.36 21.26 20.06 Source: Hong Kong Census and Statistics Department, Hong Kong Monthly Digest of Statistics, various issues. The organization of this chapter is as follows. Following this introductory section, on pp. 165...

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