Previous

Part - VI

Rationale for an Asian Currency Union

Considering the economic growth and inflation rate, China, Hong Kong and Taiwan belong to three different areas from 1983 to 1997. China is high inflation and low income, while Taiwan is low inflation and high income comparatively. Although Hong Kong belongs to the high income level, it suffers a average 8 percent high inflation rate per year. That results from Hong Kong implementing the fixed exchange rate policy that pegged its currency to the US dollar. Therefore, from the differences of monetary policy objective and economic development, forming a monetary union was not possible during the period.

China's economic development falls behind Hong Kong and Taiwan. Nevertheless, the inflation rate has gradually become stable and close after the financial crisis. As time went by, China inhered with the advantages of its cheap labors, lands and vast market potential, it grew with a amazing speed over 8.5 percent average in the late six years. Even though the heavy slump of the world economy, the economic growth forecast of China remains 7.4 percent high in 2001. Therefore, because the policy objectives of the three have been closer and the gap of the economic development has also become smaller, the possibility and condition of forming the great "Chinese Economic Area" as Asian Currency Union is increasing progressively.

Moreover, since another important criterion is whether the intra-region countries are economically highly interdependent. Analyzing the Taiwan trade balance with Mainland China, Hong Kong and the world, Taiwan possesed increasing trade surplus with China and Hong Kong year by year, but had a downward trend in trade surplus with the world. This represents the degree of economic dependence of Taiwan with China and Hong Kong deepens gradually.

At last, three major economic indicators including per capita GDP, money supply (M2) and interest rate are applied to caculate the coefficients of correlation among countries. The indicators can be used to examine whether the external shocks to China, Hong Kong and Taiwan are symmetric. The per capita GDP indicator represents the internal adjustment when facing external shocks. And the money supply represents the responds and preferences of monetary policy authority when shocks affect the financial environment. Interest rate can be used to estimate the change of investment decisions.

Next

* Contributed by -
Vipul Mittal,
First Year, MBA (Global),
IMT, Nagpur.