Currency Substitution between Hong Kong Dollar and Renminbi in South China

This paper estimates the demand for the Hong Kong currency circulating in the Guangdong Province of China and Macau. The amount of Hong Kong Dollar circulating in the Guangdong (Macau) region is reckoned to be 7.4 (3.2) per cent of the total amount issued in Hong Kong. The estimated coefficients in the currency demand equation suggest that the Hong Kong currency in Guangdong is used mainly for transactions. Therefore, in spite of strong evidence of currency substitution of the renminbi with the Hong Kong dollar, its impact on the exchange rate and on the international reserves of Hong Kong during currency crisis should be minimal