There are few recent historical precedents for maintaining the high degree of separation that still prevails between the internal monetary arrangements of Hong Kong and mainland China. This paper explains why this separation is likely to erode and considers the economics of the different forms that monetary unification of China could take. It argues that achieving such unification without resorting to capital controls or expropriation is a precondition for developing a second major international currency in East Asia that would rival the yen. Until the renminbi has been established as an international currency within a unified and sound financial system that has achieved Hong Kong's current standards, there can be no progress toward a regional monetary union in East Asia. An internal goal of Chinese monetary union is banking reform and financial integration, and an external goal is to help emancipate both China and East Asia as a whole safely from the U.S. dollar standard.
This paper was presented at the Asian Economic Panel meeting held on 11–12 May 2003 in Tokyo. Naoyuki Yoshino (Keio University, Tokyo), Fan Gang (National Economic Research Institute, Beijing), Richard Wong (The University of Hong Kong), and the editor of this journal, Wing Thye Woo (University of California, Davis), provided excellent discussion and perspectives helpful for revisions. An earlier version was presented by von Furstenberg at the 22 June 2002 G8 Pre-Summit conference, Sustaining Global Growth: Prosperity, Security and Development Challenges for the Kananaskis G8, hosted by the University of Calgary, the Guido Carli Association, the G8 Research Group, and the Research Group on Global Financial Governance, in Calgary, Canada. Wei would like to thank the Hong Kong Institute for Monetary Research for allowing him to be in residence as a visiting predoctoral fellow in the fall of 2002.