Chapter 3 Analysis of the Substitution Effect of RMB to Hong Kong Dollar

After the 2008 global financial crisis, the world has been through an improving economic integration. The scale of RMB cross-border transaction flows expands as well. Countries around China are gradually accepting the RMB as a means of trading and investing. Nowadays, the phenomenon of RMB substitutes the currencies of neighboring countries has become more and more widespread. As a frontier region for China's opening up to the outside world, Hong Kong's financial market is highly transparent with perfect infrastructures. The completion of the Hong Kong offshore RMB market leads to a rise of the RMB stock in Hong Kong, so there is a clear phenomenon of RMB substituting Hong Kong dollars (HKDs) in Hong Kong. This paper studies the substitution effect of RMB and HKD from both theoretical and empirical aspects, and puts forward policy recommendations based on the research results.