Whether Macau Pataca Should Shift Currency Peg Form Hkd to Rmb

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Table of Contents
Introduction1
Background information of Macau Pataca1
The prospective of RMB3
The prospective of HKD4
The analysis of whether Macau MOP should shift currency peg form HKD to RMB 6 1.1.1 From Macau Pataca should peg with RMB point of view6 1.1.2 From Macau Pataca should peg with HKD point of view 7

Conclusion8
Reference9

1. Introduction

There are many reasons to celebrate Macau’s economic growth which enabled Macau push up the exchange rate of domestic currency Pataca. Unfortunately, the Pataca has been depreciating rapidly the currency RMB, its largest trading partner mainland. Macau Pataca fell from 1.03 Yuan/MOP at July 2005 to 0.85 Yuan/MOP in April 2009. Base on the past three and half years record, we can say the falling is never reach the end.

2. Background information of Macau Pataca

The Pataca has been the legal tender in Macau for almost a century. It had originally been pegged with the Portuguese escudo at a rate of one Pataca equivalent to five escudos. In 1977, because of the sharp devaluation of the escudo after the Carnation Revolution in Portugal, Macau responded by uncoupling the Pataca from the escudo on 7 April and pegging it to the HKD 0.3 The Macau Government had failed to set the Pataca at par with the HKD twice after the establishment of the official link. Since the late 1980s, the Macau Pataca has been pegged to the HKD at 1.03MOP:1HKD. The prevailing CBA requires the two note-issuing banks, the BOC and the BNU to deliver HKD to the Monetary Authority of Macau (AMCM) in return for the non-interest bearing certificates. The HKD receipts are then counted as part of the official foreign exchange reserves held in the AMCM. In 1983, the Sino-British dispute over the future of Hong Kong sparked a confidence crisis in Hong Kong. To pre-empt the weakening in confidence from deteriorating into a full-blown economic crisis, the Hong Kong Government resumed the currency board system on 17 October 1983, effectively linking the HKD to the USD at a rate of HKD7.8:USD1. Attributable to the CBAs in Macau and Hong Kong, so the Pataca is indirectly linked to the USD at an exchange rate of about MOP8.03:USD1.

3. The prospective of RMB

RMB has continuously appreciated against the HK dollar. It is stable to appreciate during this year. As the result, the inflation rate increases. And the interest rate also increases. Even our domestic trade is also accept to use HK dollar, more and more domestic and foreign businesses try to adopt RMB because of the currency risk which is a gradual process that control by Chinese Central Government. The trading between China and neighboring countries are gradual use RMB and gradually expand the areas. In order to engage the sustainable development of RMB and the economics of China, Chinese Central Government has some restrictions about RMB such as the exchange amount, the gradual appreciation of RMB, the stabilization and so on.

Since 2005 China announced to keep RMB gradual appreciation. RMB also has some policies to accelerate internationalize because of the large amount of foreign debt. However, Chinese Central Government still adopts action to intervene between RMB and foreign currency and control the appreciation.

However, the intervention has its drawbacks. RMB appreciation prospects under persistent and consistent under the foreign pressures there are many potential problems may arise. Like other fixed exchange rate systems, currency boards prevent governments from setting their own interest rates. For example, Hong Kong’s interest rates are in effect set by the Federal Reserve in the US. Since its inflation rate was higher than that in the US in the 1990s, this resulted in low and sometimes negative real interest rates. Form the table we can see the interest rate volatility is very high.

Moreover, the weaknesses could be...
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