a tale of two exchange rate systems: singapore and hong kong. how well have their respective...

8/10/2019 A Tale of Two Exchange Rate Systems: Singapore and Hong Kong. How well have their respective monetary/exch

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A Tale of Two Exchange Rate Systems: Singapore and Hong Kong

ECON 103 International Economics A

Section G12

Topic 5:

A Tale of Two Exchange Rate Systems: Singapore and Hong Kong. How well have

their respective monetary/exchange rate systems served their economies

Prepared For:

!rofessor "ong #ot $hyi

Prepared !:

$hong H%ai &iao

H% 'heng(in

)ee Kang "ee

*orit+ ,a%mann

Randy -ng Kee *eng

CONTENTS


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Execti!e Smmary........................................................................................... 2

"# $ntrodction.................................................................................................... 3

"#" The $mpossi%le Trinity and Choices of the Cities................................3

"#& E'ecti!e Exchange Rate..........................................................................4

"#( Economic Strctre of Singapore and Hong Kong..............................4

Analysis of $mpact of Exchange Rate Systems ) Side*%y*SideComparison of Singapore and Hong Kong.....................................................6

" Economic Sta%ility * $n+ation.................................................................6

& Economic Sta%ility * ,nemployment.....................................................7

( Economic -rowth * -./...........................................................................8

Economic -rowth * Openness to Trade...............................................10

(# Case Stdy Analysis....................................................................................11

(#" Asian 1inancial Crisis 2"3345................................................................11(#& -lo%al 1inancial Crisis 2&6675...............................................................13

0# Conclsion.....................................................................................................15

8i%liography......................................................................................................16

1


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E9EC,T$E S,;;AR


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Hong Kong chose to esta"lish a c$rrency "oard system in 1=83! pegging its

e&change rate to S )ollar. (heir impending ret$rn o# soereignty to D:S! 2001A! promoting price sta"ility and economic growth while

presering the p$rchasing power o# Singapore )ollar >SE)A is their main

o"ectie #or choosing a managed +oat regime. (he managed +oat regime /ept

in+ation rates low and sta"le and appreciate grad$ally oer time thro$gh a so#t

peg to Singapore%s maor trading partners. (he regime also allows goernment to

manage h$ge mar/et shoc/s and spec$lation thro$gh direct meas$res s$ch as

"$ying and selling in the #oreign e&change mar/et.

"#& E11ECT$E E9CHAN-E RATE

(o hae a "asis #or comparison! we will loo/ at the nominal and real e'ectie

e&change rate #or the two cities. ominal 9'ectie 9&change ate >99A is the

$nad$sted weighted aerage o# a pool o# #oreign c$rrency against the domestic

c$rrency. eal 9'ectie 9&change ate >99A is the in+ationad$sted al$e o#

the 99. 99 is $sed as a mean to determine nominal appreciate or

depreciation o# the domestic c$rrency! while 99 is $sed to determine the

p$rchasing power o# domestic c$rrency against the #oreign c$rrency.

"#( ECONO;$C STR,CT,RE O1 S$N-A/ORE AN. HON- KON-

Since "oth co$ntries are small geographically and are "oth e-$ipped with little

reso$rces! they sho$ld act$ally #eat$re the same distri"$tion o# the three sectors

agric$lt$re! man$#act$ring and serices. oth co$ntries hae $ndergone a rapid

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shi#t towards more /nowledge"ased actiities and clim"ed $p the al$echain

d$ring the last decade.

)espite these similarities! the economic distri"$tion di'ers "etween the 2

co$ntries. 9en tho$gh the Eross )omestic Frod$ct o# Singapore! which was

worth 362.7 "illion S )ollars in 2012! is -$ite similar to the E)F o# Hong Kong!

which was 363.7 "illion S )ollars >*nde&m$ndiA! there are some di'erences in

the siCe o# the man$#act$ring and the serices sector. (he agric$lt$ral sector

acco$nts #or 0G o# E)F in "oth co$ntries! li/ely d$e to the lac/ o# h$man capital

and land reso$rce. Howeer! the man$#act$ring sector in Singapore is m$ch

larger! contri"$ting to 27.8G o# E)F compared to that o# Hong Kong! where E)F

contri"$tion is only 7G. (he di'erence o# 20.8G goes into the larger serice

sector in Hong Kong! which acco$nts #or =3G. whereas in Singapore! this sector

only contri"$tes to 72.2G o# the E)F. 9en witho$t the p$"lic sector! serices in

Hong Kong still acco$nt #or 84G o# E)F >Hong Kong Eoernment! 2013A.

(hese are signi,cant di'erences. e co$ld s$ggest that the roots o# these

ine-$alities are the di'erent e&change rate regimes in Singapore and Hong Kong.

$t in #act! there is a way more simple reason that acco$nts #or the di'erences.

(he post1=78 economic re#orms o# the


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:nderlini! 2012A! this arg$ment has "een

wea/ened! "$t the impacts still remain. (here is little e&change rate ris/ in Hong

Kong moing its entire man$#act$ring sector oerseas to


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ANA=D:S! 2001A.

*n+ation patterns are closely related to the e&change rate policies o# "oth

nations. (his is most distinct d$ring periods o# strong economic growth in the

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world. ;rom 1=88 to 1==5! economic conditions were strong! and Hong Kong and

Singapore saw strong E)F growth >;ig 3A. ominal e&change rate was allowed to

appreciate in Singapore! which o'sets the impact on in+ation >D:S! 2001A. (he

in+ation rates d$ring that period were low at 2.35G. *n contrast! Hong Kong saw

an aerage in+ation o# 8.7=G. *n Hong Kong! the monetary policy is aimed at

achieing a sta"le nominal e&change rate against the S)! which res$lted in no

monetary policy responses to in+ation >Eerlach ? EerlachKristen! 2006A.

*n+ation was th$s allowed to soar.

: similar o"seration can "e made d$ring periods o# wea/ening economic

conditions d$ring the mid1=80s. Singapore%s e&change rate policy allowed it to

/eep in+ation low d$ring the recessionary period "ro$ght a"o$t "y .S.:%s

recession! which had a ripple e'ect on the rest o# the world economy. *n order to

regain competitieness! Singapore allowed its 99 to depreciate in order to

"ring down its 99 >D:S! 2001A. *n contrast! Hong Kong%s in+ation remained

m$ch higher.

erall! Hong Kong has seen higher in+ation rates! and also more olatile

in+ation as compared to Singapore. (his is consistent with each nation%s

monetary policy o"ectie. Singapore%s e&change rate policy allows it to respond

m$ch -$ic/er to ario$s in+ation shoc/s! and allows it to control the in+ation

leels. n the other hand! Hong Kong places a #oc$s on ,nancial sta"ility

thro$gh lin/ing with .S.:.

& ECONO;$C STA8$=$T< * ,NE;/=O


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;ig 2. >*nternational Donetary ;$ndA

*n general! "oth economies hae "een a"le to /eep $nemployment rates low. :s

seen #rom ;ig 2! the aerage $nemployment rate #or Hong Kong #rom 1=80 to

2012 is 3.45G! while that o# Singapore is 3.17G. oth co$ntries are competitie!

open economies! and $nemployment rates are generally /ept low! aro$nd the

same leels all the way #rom 1=80 to 1==7. Howeer! we noticed an interesting

pattern #rom 1==8 onwards! which was the onset o# the :sian ;inancial @ip! 2005A.

(his is also e&acer"ated "y


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0100000000000

200000000000

300000000000

E)F >ann$al GA

SE E)F ErowthG HK E)F ErowthG

( ECONO;$C -RO>TH *

-./

;ig$re 3 depicts the E)F growth rates o# Singapore and Hong Kong #rom 1=83 to

2011. oth co$ntries e&perience relatiely high growth rates d$ring this period!

as compared to the world%s aerage growth in E)F. )$ring this period! Singapore

e&perienced an aerage E)F growth o# 6.54G while Hong Kong achieed an

aerage o# 4.78G. (er"erg! 2012A.(h$s "oth e&change rate regimes seem

to sere its respectie economies well. Howeer! oer the years despite showing

similar trends in the spi/es and declines! it can "e o"sered #rom ;ig$re 3 that

Singapore%s E)F growth rate is consistently higher than Hong Kong. Singapore%s

real E)F ,nally oertoo/ Hong Kong%s in 2011! as shown in ,g$re 4! despite

Hong Kong haing almost 2 times o# Singapore%s E)F in 1==7.

)espite haing similar demographics! economic policies and "$siness

enironment! "oth co$ntries e&perienced di'erent economic growth where

Singapore o$tper#ormed Hong Kong in recent years. (his di'erence can "e

e&plained "y the 2 di'erent e&change rate regimes. ne reason was d$e to

10

;ig 4;ig 3


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imported in+ation. Fegged to a wea/ening S dollar! Hong Kong%s e&change rate

depreciated against its trading partners. Deanwhile


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ECONO;$C -RO>TH * O/ENNESS TO TRA.E

0

100

200

300

$mport :ale $ndex 2&666?"665

SE HK

0

100

200

300

400

Export :ale $ndex 2&666?"665

SE HK

)espite haing 2 di'erent e&change rate regimes! ;ig$res 5 shows a stri/inglysimilar trend in the imports and e&ports o# Singapore and Hong Kong. 9&port and

import al$es hae seen a strong increase thro$gho$t the years. oth co$ntries

hae high openness to trade! where e&ports o# goods and serices oer E)F #or

Hong Kong and Singapore are at 222.=6G and 208.=5G respectiely >(rading

9conomicsA.

Since Singapore has a small economy! it is essentially a price ta/er as it does not

hae the a"ility to a'ect world price. (he high import content o# domesticdemand means that domestic prices are $lnera"le to any change in world price

12

;ig 6;ig 5


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and e&change rate. ;$rthermore! the change in e&change rate will a'ect

domestic demand and demand #or domestic reso$rces. (h$s! "y $tilising a

managed +oating rate system! Singapore has "een a"le to maintain price

sta"ility! strengthen its e&port demands thro$gho$t the years and control its

in+ation leel.

n the other hand! Hong Kong%s choice o# a ,&ed e&change rate regime has also

sered it well in term o# international trade. *ntrod$ced to restore con,dence in

Hong Kong dollar >@ip! 2005A! the ,&ed e&change rates regime helped its small

"$t open economy. (he ,&ed e&change rate red$ced the cost o# e&change rate

olatility! al"eit at the e&pense o# other economic aria"les s$ch as in+ation.

ith the Hong Kong dollar pegged to S)! it is easier #or "$siness to estimate

costs! determine pricing and #orecast reen$es! as they do not need to worry

a"o$t losses d$e to +$ct$ations in e&change rates.

(h$s despite Singapore and Hong Kong haing similar economic characteristics

"$t di'erent e&change rate regimes! the systems adopted seem to hae sered

its respectie economy well.

(# CASE ST,.< ANA=


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shoc/s and s$stain a real e'ectie e&change rate that is constant with the

economy%s macroeconomic #$ndamentals. *n 1==7! D:S engineered Singapore

dollars to depreciate "y 20G to c$shion and steer the economy to a so#t landing

>Dahinda ? :noma! 2003A. (his res$lted in relatiely sta"le domestic prices and

allows nominal depreciation to translate into an $nderal$ed real e'ectie

e&change rate >99A. ased on ;ig$re 7 and 8! Singapore%s 99 o$tplaced

that o# its 99 while Hong Kong e&perienced stronger appreciation o# its 99

than 99 d$e to higher domestic in+ation rate. (his implies that Hong Kong%s

oerall e&port per#ormance is lagging "ehind Singapore.

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>;ig$re 7A

>;ig$re 8A

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*n Hong Kong! the less transparent and more independent ,&ed e&change rate

regime! were responsi"le #or growing misalignments o# the economy d$ring the

crisis. )$ring the regional crisis! Hong Kong dollar "eing rigidly peg to the S)

led to an oeral$ation o# the c$rrency #rom second -$arter o# 1==7. :longside

with deal$ation o# Singapore c$rrencies! Hong Kong "ecame more s$scepti"le

to spec$latie attac/ as large amo$nt o# reseres was necessary to hold the

,&ed e&change rate in place. :dditionally! they made no attempt to interene in

their capital mar/et! $nli/e Singapore who sold "onds to raise long term

,nances. (here#ore! Hong Kong%s E)F #ell "y 5G while Singapore "eing one o#

the #ew economies in 9ast :sia! achieed a positie growth o# 0.5G that year

>am/ishen! 2000A.

(#& -=O8A= 1$NANC$A= CR$S$S 2&6675

(he glo"al ,nancial crisis is one where Singapore #aces sharpest economic

downt$rn! een more seere than that o# the :sian ,nancial crisis. hile the

impact o# :sian crisis was #elt immediately! the impact o# glo"al crisis was

delayed and only "ite in d$ring the third -$arter o# 2008. *n :pril 2008! D:S

decided to recentre the Singapore dollar e&change rate "and and contin$ed its

#o$ryear appreciation policy. Howeer! in cto"er 2008 they read$sted its

policy stance to Cero percent appreciation with no recentring o# the "and or

change to the width. (hro$gh this period! the Singapore economy remains

anchored "y so$nd #$ndamentals and resilient ,nancial system. nli/e the :sian

crisis! there is no $nd$e wea/ening o# the c$rrency where Singapore dollars was

allowed to depreciate against S) and appreciate against regional c$rrencies

>im ? Jaya! 2010A. (here#ore! Singapore c$rrency was appreciating when the

crisis occ$rred and only changed to a ne$tral and depreciating stance when

e&ports pl$nge and in+ation started trending downwards.

etween 200= and 2010 $nemployment rate #ell #rom 3G to 2.2G >;ig$re =A d$e

to aaila"ility o# large pool o# #oreign wor/ers >< ? in! 2013A. (his proided

"$'er against rising $nemployment d$ring the crisis and made the economy less

$lnera"le compared to the :sian crisis preio$sly. (here#ore! while Singapore%s

economy contracted in 200= as a res$lt o# the glo"al ,nancial crisis! it re"o$nded

"ac/ in 2010 >;ig$re 10A thro$gh regained e&port competitieness.

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;or economies with a ,&ed e&change rate regime and per#ect cross"order

capital mo"ility! s$ch as Hong Kong! haing ade-$ate ,scal scope to c$shion

economic downt$rns is partic$larly important. nder a ,&ed e&change rate

regime and with an open ,nancial acco$nt! the Hong Kong monetary a$thority

cannot p$rs$e an independent monetary policy.

esponding to the crisis! Hong Kong goernment instantly set #orth a series o#

meas$res to sta"iliCe the ,nancial mar/et! #oster employment and #$nd

"$sinesses. :s a serice economy! Hong Kong%s ,nancial sector was seerely

impacted as prod$ctiity and employment declined >< ? in! 2013A. ;ort$nately!

most "an/s in Hong Kong hae raised their proision leels and were s$Bciently

capitaliCed to weather the crisis >)e$tsche an/ esearch 200=A. :dditionally!

Hong Kong%s close ties with


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18


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>;ig$re 10A

0# CONC=,S$ON

(he more +e&i"le intermediate e&change rate regime in Singapore has

o$tper#ormed the c$rrency "oard system in Hong Kong in general. Singapore has

seen generally lower leels o# in+ation and $nemployment! as well as stronger

growth. @et! that is not to say that Hong Kong sho$ld change their system as it

inoles a highly complicated and diBc$lt sit$ation that they hae to weigh

against their economy.

ased on the two case st$dies! "oth economies are per#orming well to e&isting

e&pectations altho$gh Singapore stands o$t as a more s$ccess#$l model o# an

intermediate #oreign e&change regime "y re+ecting a #aster and stronger

economic recoery as opposed to Hong Kong >im ? Jaya! 2010A. eertheless!

while e&change rate policy co$ld "e one #actor $ndermining oerall recoery o#

the two economies! so$nd instit$tional and economic #$ndamentals are e-$ally

cr$cial in determining ,nancial sta"ility and growth o# the co$ntry. hile

Singapore seems to adapt well to ,nancial crises! they are not spared #rom the

e'ects! as seen #rom decreased growth and employment. *n addition to

monetary policies! "oth co$ntries need to hae strong ,nancial #$ndamentals

1=


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and so$nd macroeconomic policies to ens$re that the economy is less $lnera"le

to e&ternal shoc/s.

8$8=$O-RA/H2012A. (he importance o# ,scal pr$dence $nder the in/ed9&change ate System in Hong Kong S:. Bank for InternationalSettlements Papers No 67! 173177.

rettha$e roo/! N. (. >2006A. : ;eminist :nalysis o# Fop$lar D$sic Fower er!"ecti,cation o#! and Oiolence :gainst omen.Journal of Feminist FamilyTherapy! p2=51! 23.

2013A. *mpact o# the 2008 Elo"al ;inancial 2011A. &lo'al conomics>13 ed.A. So$thestern 2003A. : (ale o# (wo )ecem"er! 2001A. (he 4A! 42=451.

Hong Kong Eoernment. >2013A. ,ong -ong+ The Facts.

*nde&m$ndi. >n.d.A. Singapore &2P 3 composition 'y sector. etrieed #rom*nde&m$ndihttpLLwww.inde&m$ndi.comLSingaporeLgdpQcompositionQ"yQsector.html

20


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*nde&m$ndi. >n.d.A ,ong -ong &2P 3 composition 'y sector. etrieed #rom*nde&m$ndi

httpLLwww.inde&m$ndi.comLhongQ/ongLgdpQcompositionQ"yQsector.html

*nternational Donetary ;$nd. >n.d.A. 4orl" conomic *utlook 2ata'ase. etrieed

18 10! 2013! #rom *nternational Donetary ;$ndhttpLLwww.im#.orgLe&ternalLp$"sL#tLweoL2013L02LweodataLinde&.asp&

Kawai! D. >200=A. (he *mpact o# the Elo"al ;inancial n.d.A. xport of &oo"s an" Ser#ices 89 of &2P: in ,ong-ong. etrieed #rom (rading 9conomicshttpLLwww.tradingeconomics.comLhong/ongLe&portso#goodsandsericespercento#gdpw"data.html

(er"erg! E. >27 7! 2012A.5n *ptimistic nergy;&2P Forecast to 12002A. : )isc$ssion ote on Hong Kongs in/ed 9&change ate Systemand a Froposed e#orm o# Hong Kongs age System. ,-C( >etters.

@ip! F. S. >2005A. n the Daintenance


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