The implementation of the CEPA agreement from January 1, establishing tariff-free trade between the Special Administrative Regions of Hong Kong and Macao with the Mainland, will prove of enormous economic interest for a variety of reasons. In particular, it will provide a fascinating laboratory for Chinese economic liberalization, deepening the relationship between the distinct but integrated economies of the Pearl River Delta. It will also increase the prominence of a remarkable inheritance: the adoption of the Hong Kong dollar as a second significant currency within the overall Chinese economy.
While globalization is regularly lambasted for homogenizing the world, this accusation is rarely extended to the field of currency integration. As the European project to establish the euro demonstrates, world opinion typically assumes that a reduction in the number of currencies is of unquestionable benefit. Many even dream of a world currency, eliminating foreign exchange issues entirely.
The great economist of cities, Jane Jacobs, has made some highly cogent arguments against this assumption. She contends that cities - rather than nations - are the true building blocks of the world economy, with currencies providing important feedback to these engines of economic development, just as the sensors of a thermostat send feedback to a heating system, appropriately adjusting its behaviour. As with a thermostat, the feedback received on international currency markets tells the economy in question about the proper level of stimulation required to avoid "freezing" or "overheating".
From Jacobs' perspective it is no surprise that the most successful economies of the post-war period - and perhaps throughout history - have been of the "city state" type, exactly those receiving the most finely tuned feedback from their own currencies. Singapore and Hong Kong conform to this pattern perfectly. Since the level of financial inhibition or stimulation provided by interest rates are never likely to be exactly suitable for more than one city at a time, large (national) economies will tend to suffer from regional imbalances caused by their subjection to a wide and uniform currency regime. Jacobs makes the intriguing suggestion that every currency area encourages economic concentration within a single urban centre, the one with the power to "tune itself in" to the national currency, at the ultimate expense of all the rest.
Because the US is such an entrepreneurial, mobile and innovative society, this effect is camouflaged in the world's largest economy, although the development of its southern states has probably been grossly impaired by the unified "greenback" regime, with the US as a whole perhaps sacrificing something in the region of 1 per cent annual average growth to its common currency. There is no reason to think other large single-currency areas, such as China, pay any smaller cost in terms of overall GDP inhibition and regional disparity. The fact that the eurozone has consistently and substantially underperformed non-eurozone EU economies since its inception lends strong support to such a diagnosis.
When a large single currency area makes natural economic adjustments impossible, due to the extreme regional insensitivity of its macro-economic climate, imbalances have to be resolved in other ways. Traditionally migration has been the principal response, with the US being exemplary in this respect. With cultural barriers impeding population mobility, Europe is unlikely to find this adjustment working smoothly. China will also find that its unified national currency promotes uncomfortable levels of migratory pressure, with weak macro-economic feedback triggering population flows from relatively "underheated" zones to "overheated" ones.
While hopes for radical currency decentralization in either the US or China are highly unlikely to be realized, the surreptitious transformation of the Hong Kong dollar into a "Pearl River Delta dollar", operative within the entire Hong Kong-Shenzhen-Guangzhou urban sprawl, would be an interesting step in this direction. As for a "Yangtze Delta dollar", that almost certainly belongs to the realm of economic purists' dreams. Still, Shanghai probably has little reason to worry - if Jacobs is right, the Mainland's foremost economic powerhouse will end up with a currency "of its own" in any case: the renminbi.
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