Is Optimum Currency Area Feasible In East Asia? A Regional Study On Mainland China And Hong Kong

Abstract

This paper evaluates the possibility of forming a common currency area in Mainland China and Hong Kong using five economic indices that are used as criterion for the optimality of a currency area in the literature and finds mixed results. The higher product diversification in Mainland China, low correlations in real output growth, money growth, nominal interest rate and real interest rate, dissimilarity of industry structures and inflation rates do not support the formation of a currency union between the two regions. However, the analysis of degrees of openness is in favor of Hong Kong forming a monetary union with Mainland China.