Professional Documents
Culture Documents
Prepared For:
Professor Wong Fot Chyi
Prepared By:
Chong Huai Jiao
Hu Zhengbin
Lee Kang Wee
Moritz Baumann
Randy Ong Kee Meng
CONTENTS
EXECUTIVE SUMMARY
Singapore and Hong Kong are 2 city states that share so many similar
characteristics and economic traits. However, both of these countries exchange
rate regimes are drastically different from each other. This paper compares and
contrast the two different exchange rate regimes, and attempt to determine how
well has these regimes served their respective countries.
Due to the Impossible Trinity, countries cannot achieve free capital flow, fixed
exchange rate and sovereign monetary policy all at the same time. Hence with
small and open economies, Singapore and Hong Kong requires free capital flow
into their economies. This results in Singapore choosing a managed float
exchange rate regime and Hong Kong selecting a currency board system, pegged
to the US dollar.
Singapore and Hong Kong possess two very different economic structures, where
the manufacturing sector contributes largely to Singapores economy, unlike
Hong Kong. While the two different exchange rates regimes no doubt have an
impact countries economic structure, it is neither the main nor sole cause for
the different structures. Rather, political influence is shown to be the main factor
in shaping the structure of Singapore and Hong Kongs economies.
Singapore enjoys more economic stability, where its inflation and employment
rates are generally more stable than Hong Kongs. Over the years, Singapores
inflation rates are less volatile, and lower than Hong Kong. In addition, Hong
Kong experiences a more employment rates in recent years and takes a longer
time to recover after recessions.
Both exchange rate regimes have served their respective countries well in term
of economic growth. Singapore and Hong Kong have similar economic growth
patterns and international trade. However, Singapore enjoys higher economic
growth and performance over the years.
Lastly, through the rigorous analysis of two case studies, Singapores managed
float exchange rate regime is deemed to have outperformed the currency board
of Hong Kong. Both economies are performing well to existing expectations
although Singapore stands out as a more successful model of an intermediate
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1. INTRODUCTION
Hong Kong and Singapore's economy are small, open and export-oriented. The
two cities also serve their regions as a major trading port and regional financial
centre. Despite the similarities, Hong Kong and Singapore differs greatly in their
exchange-rate system and monetary policy. Hong Kong follows currency board
system and pegged their currency to United State at a fixed rate of 7.8, while
Singapore adheres to a managed floating system where the currency value is
managed against a basket of twelve currencies.
In this paper we first look at the basis for the choosing of exchange rate system.
Second, we examine the economic structure of both countries, and examine the
differences between the 2 nations and see if the differences are due to the
exchange rate policies. Next, we analyse the implication of the two cities
exchange-rate system on the growth of their economy. Lastly, we look at how the
exchange rate system of the two cities deflects impact from the East Asian
Financial Crisis in 1997-98 and the Subprime mortgage crisis in 2008.
capital
available
as
well,
it
cannot
afford
migrating
its
entire
manufacturing sector.
-2
-4
-6
1
0
SG GDP
HK GDP
HK GDP Growth%
Figure 3 depicts the GDP growth rates of Singapore and Hong Kong from 1983 to
2011. Both countries experience relatively high growth rates during this period,
as compared to the worlds average growth in GDP. During this period, Singapore
experienced an average GDP growth of 6.54% while Hong Kong achieved an
average of 4.78%. Comparatively, the world average GDP growth rate for that
period was only 2.4% (Tverberg, 2012). Thus both exchange rate regimes seem
to serve its respective economies well. However, over the years despite showing
Fig 3
Fig 4
similar trends in the spikes and declines, it can be observed from Figure 3 that
Singapores GDP growth rate is consistently higher than Hong Kong. Singapores
real GDP finally overtook Hong Kongs in 2011, as shown in figure 4, despite
Hong Kong having almost 2 times of Singapores GDP in 1997.
Despite
having
similar
demographics,
economic
policies
and
business
monetary
policies
has
strong
impact
on
its
economic
growth
and
performance. A perfect case study to illustrate this impact is the 1997 Asian
Financial Crisis. Hong Kongs NEER in 1998 to 2002 was 11.4% higher than in
1996 (Yip, 2005). And since it pegged its currency to the then increasingly strong
US dollar, it could not use exchange rate depreciation to mitigate the adverse
impacts. This increased the burden of price and wage adjustment and deepened
the recession. Hence its inability to implement its own monetary policy adversely
affected Hong Kongs economic performance. This can be further supported from
the fact that Singapores real GDP was relatively flat after mid-1997, whereas
Hong Kong experienced a large contraction (Devereux, 2003).
11
SG
HK
Fig 5
Fig 6
SG
HK
14
(Figure 7)
(Figure 8)
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In Hong Kong, the less transparent and more independent fixed exchange rate
regime, were responsible for growing misalignments of the economy during the
crisis. During the regional crisis, Hong Kong dollar being rigidly peg to the USD
led to an overvaluation of the currency from second quarter of 1997. Alongside
with devaluation of Singapore currencies, Hong Kong became more susceptible
to speculative attack as large amount of reserves was necessary to hold the
fixed exchange rate in place. Additionally, they made no attempt to intervene in
their capital market, unlike Singapore who sold bonds to raise long term
finances. Therefore, Hong Kongs GDP fell by 5% while Singapore being one of
the few economies in East Asia, achieved a positive growth of 0.5% that year
(Ramkishen, 2000).
17
18
(Figure 10)
4. CONCLUSION
The more flexible intermediate exchange rate regime in Singapore has
outperformed the currency board system in Hong Kong in general. Singapore has
seen generally lower levels of inflation and unemployment, as well as stronger
growth. Yet, that is not to say that Hong Kong should change their system as it
involves a highly complicated and difficult situation that they have to weigh
against their economy.
Based on the two case studies, both economies are performing well to existing
expectations although Singapore stands out as a more successful model of an
intermediate foreign exchange regime by reflecting a faster and stronger
economic recovery as opposed to Hong Kong (Lim & Jaya, 2010). Nevertheless,
while exchange rate policy could be one factor undermining overall recovery of
the two economies, sound institutional and economic fundamentals are equally
crucial in determining financial stability and growth of the country. While
Singapore seems to adapt well to financial crises, they are not spared from the
effects, as seen from decreased growth and employment. In addition to
monetary policies, both countries need to have strong financial fundamentals
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