The Impact of Depreciation of HK Dollar on HKs Domestic Export - Essay Example

 The Impact of Depreciation of HK Dollar on HK’s Domestic Export Table of Contents 2.3 Objective of the Study 4 2.4 Statement of Hypothesis 7 Chapter 3 - Procedure and methodology 8 3.1 Data Source 9 3.2 Data Collection 9 3.2.1 Data Variables 9 3.2.2 Population 10 3.2.3. Sample 10 3.2.4 Data analysis strategy 10 3.2.5 Research method 12 3.3 Potential limitations 13 References 14 Babbie, E. R. (2009) The Practice of Social Research (12th Edition), pp483. USA: Cengage. 14 Blanchard, O. (2005) Macroeconomics (3rd Edition), pp397. USA: Pearson Prentice-Hall. 14 Fane, G. (2000). Capital mobility, exchange rates, and economic crises, pp170-172. UK: Edward Elgar. 14 Fukasaku, K., Wall, D. & Wu, M. (1994) China's long march to an open economy, pp90. Paris, France: OECD. 14 Gouriéroux, C. & Monfort, A. (1995) Statistics and Econometric Models: Testing, confidence regions, model selection, and asymptotic theory, pp304. Cambridge University Press. 14 Gravetter, F. J. & Wallnau, L. B. (2006) Statistics for the Behavioral Sciences (8th Edition), pp383. USA: Cengage Learning. 15 Jao, Y. C. (2001) The Asian financial crisis and the ordeal of Hong Kong, pp147. USA: Greenwood Publishing. 15 Lei, C. K. & Yao, S. (2009) Economic Convergence in Greater China, pp201. London, UK: Routledge. 15 MacDonald, T. H. (2007) Basic concepts in statistics and epidemiology, pp80. Oxford, UK: Radcliffe Publishing. 15 Perry, M. (1999) Small firms and network economies, pp67. London, UK: Routledge. 15 Reed, B. J. & Swain, J. W. (1997) Public finance administration (2nd Edition), pp129. California, USA: Sage Publications. 15 Talentino, P. E. (2007) ‘Explaining multinational companies from the developing economies of East and Southeast Asia’ in Handbook of research on Asian business, pp416 by Yeung, H. W. (ed). London, UK: Edward Elgar 15 Triola, M. F. (2004) Elementary statistics (9th Edition), pp381. USA: Pearson Education. 15 Xueqiang, X. (1990) ‘Urban Development Issues in the Pearl River Delta’ in Chinese urban reform: what model now?, pp183-193 by Kwok, R. Y., Parish, W. L., Yeh, A. G. & Xueqiang, X. (eds). London, UK: M. E. Sharpe. 15 Zhang, K. H. (2003) ‘Foreign Direct Investment in China: 1979-2002’ in Asian Economic and Political Issues, Volume 8, pp15 by Columbus, F. (ed). New York, USA: Nova Science Publishers. 16 Bibliography 16 Baumol, W. J. & Blinder, A. S. (2008) Macroeconomics: Principles and Policy. USA: Cengage. 16 Edgington, E. S. (1995) Randomization tests (3rd Edition). New York, USA: Marcel Dekker. 16 Jaffe, D. (1998) Levels of socio-economic development theory (2nd Edition) USA: Greenwood Publishing. 16 Swee-Hock, S. & Wong, J. (1995) Regional Economic Development in China. Singapore: ISEAS Publishing. 16 2.3 Objective of the Study The present study aims to find out whether depreciation of Hong Kong dollar (HKD) against the domestic currency of China (CNY) has affected the volume of exports from the former. Hong Kong, an integral part of East Asia, laid down its developmental plan based on an export oriented strategy. Hong Kong is a part of China, rather it could be considered as a Special Administrative Zone (SAR) of the latter. The economy of Hong Kong has been dissociated from its mother nation, China, from financial and political aspects. This separation, commonly termed as “one country, two systems” is aimed at bringing a stronger law and order in the region (Yiu-Chung, 2004, pp9). The greater the dissection, the better will be the discipline in a region as there will not only be a single central authority, but also a regional one to handle regional issues and report to the higher administration. But, one drawback of this fragmentation is that it has converted Hong Kong into a rather insignificant territory. Though it is considered as one of the most densely populated regions in the world, the economy lacks the ownership benefits of a self acclaiming brand name or patents of advanced technology use (Talentino, 2007, pp416). The division between the Mainland of China and Hong Kong SAR has been brought about in such a way so as to wholly include the latter within the region of the emerging Pearl River Delta area. The above map displays Hong Kong as a land surrounded by the River Pearl from three sides. Hence, the economy no doubt enjoys an advantageous position compared to the other districts of The Mainland of China, given that the PRD is one of the fastest growing regions in China and almost all the firms of the nation are located in the vicinity of the area (Xueqiang, 1990, pp183-193). Nevertheless, the economy of Hong Kong, due to its small size, had suffered a lot following the Asian Financial Crisis of 1997. The nation has not been able to recover completely out of it though a decade has passed since the shock. There are several reasons for it, the primary one being the economy’s financial policies framed by the monetary authorities, i.e., HKMA. The currency board of the economy had designed a policy of maintaining a fixed exchange rate regime. In fact, even after the nation was subjected to a financial shock which hindered its economic growth prospects, the nation remained strict on its monetary policies. This especially proved to be detrimental for the region when all the neighbouring economies had adjusted their exchange rates accordingly (Fane, 2000, pp170-172). However soon they pulled themselves through the crisis by boosting their exports and stabilizing their economic growth figures. But, Hong Kong, having no ownership advantages to call its own, unlike its neighbours, coupled with a tight exchange rate regimen, could not sweep through the glitch as fast as the others did. The foreign nations, especially the developed ones, used to pour huge amounts of resources within the region before the crisis struck. Outburst of the East Asian Financial crisis led to large scale extraction of investible resources from within the region, which left the underlying nations lurking in a pathetic stage. Hong Kong too experienced the brunt of the financial crisis. The only ray of hope that remained for these nations was to shove up external demands for indigenously produced goods (Jao, 2001, pp147). However, lack of significant brand names seemed to be a massive drawback for the economy. Despite being located in the vicinity of PRD area, none of the firms located in Hong Kong could establish themselves as strong brand names, due to loopholes in the pact signed between People’s Republic of China and the newly formed Hong Kong SAR Administration. According to the terms and conditions of the agreement, firms located in Hong Kong could be set up on the basis of four different sub-contractual terms – kinship, participants, affiliation and local. The bigger ones were found to be categorized under the former three, while the latter group included mostly the SMEs. Moreover, the economy of Hong Kong is in its juvenile state which makes it almost impossible for the local firms to make it big. The bigger firms are mostly treated as subsidiaries of China and thus the income drawn from them partially goes in the pockets of the Chinese state or investors (Perry, 1999, pp67). A lack of brand advantage and modern technical skills compels the Chinese population residing in Hong Kong to incline themselves towards the production of light electronic consumer goods. However these very products happen to be in high demand among the Western nationals, who could not afford similar goods produced domestically due to their higher retail prices. In addition to the income coming from export revenues, Hong Kong is also the largest contributor of FDI investments in China. Such a measure has been adopted by the latter to enable its subsidiary to fight back the mortifications of impoverishment. It has helped the former to access the modern technologies being used by the Chinese firms and a huge amount of labour generated due to immigration. In fact, prior to this discrimination, Hong Kong had merely been a district of People’s Republic of China and contained a rather insignificant portion of the Chinese population. This low population figure impeded the technological improvement for the land which demeaned the figure for the entire economy. Fragmentation of Hong Kong from The Mainland of China shoved the former towards economic progress (Lei & Yao, 2009, pp201). However, the division came as a rather recent change in the economic structure of PRC. Despite this, it has been unable to create ample ownership advantages in the economy, which is the reason for the booming volume of exports and this plays a significant role from the aspect of economic development. With the economy so intensely dependent on their exports to the Western market, any fluctuation in the rate of exchange of their domestic currency posits Hong Kong at a rather vulnerable position. Since income derived from exports appears to be the most important of all channels of revenue that the national authorities have an access to, the present study targets to assess the extent of this vulnerability quotient accounting due to disruptions in the volume of exports. A comparison has been drawn with the domestic currency of China while calculating the impact of a change in the relative rate of exchange. There are two main reasons that could be raised in support of such a step. Firstly, Hong Kong, although has been established as a separate financial and economic entity, is still a part of China. The economy is considered as a Special Administrative Region (SAR) of People’s Republic of China (PRC). This is the reason why investments flowing in from Hong Kong to China are treated as those coming in from Chinese subsidiaries located in the former. In fact, this is the outlook posed by the outside nations as well, which drives them to think the two economies to be substitutes of one another. Any fluctuation in the exchange value of one will certainly affect the outside demand that it entertains (Fukasaku, Wall & Wu, 1994, pp90). Secondly, given that the economy of China is more or less a stable one, a comparison with the Chinese currency gives an idea about the stability of the compared economy too. If fluctuations are found to be rather high, it sends a signal about a disruption in the latter’s exports too (Zhang, 2003, pp15). Clearly speaking, the paper strives to find out whether any relative fluctuations in Hong Kong dollar exchange value against that of Chinese Yuan, imposes any negative impact on the volume of exports from the former. The time span being considered in this respect lies between June, 2006 and October, 2009, i.e., fluctuation arising during this phase will be the sample used in the present context (Columbus, 2003). However, there are many other elements too, which impose a similarly high impact on exports of the economy. An illustration about those possible factors, expected to portray equally significant impact on the volume of exports, will be added as a corollary. 2.4 Statement of Hypothesis Moving along the line of study, the key idea will be to examine whether variations in the relative rate of exchange poses any impact on the net volume of exports from Hong Kong. To figure out the exact relation between the two variables, a linear regression model is estimated, where the dependent variable is the domestic export made by Hong Kong while the independent variable is its rate of exchange with Chinese Yuan. The model design in this case will be as follows, Volume of Exports = b1 +b2 Rate of exchange (CNY/HKD) Since the prime target is to check the validity of relationship between the two variables, the null hypothesis involves a significance test of the coefficient of the independent variable, i.e., b2. Technically speaking, the null hypothesis in this case could be formulated as, Ho: When the exchange rate of CNY/HKD decreases, the HK’s domestic export decrease or do not change that is, b2 ≤ 0. This has to be examined against the alternative hypothesis, H1: When the exchange rate of CNY/HKD decreases, HK’s domestic exports will increase, b2 > 0. This is the case of a one-tailed test, since the null hypothesis aims to find out if the effect of change in the rate of exchange brings a negative or no impact to the export performance of Hong Kong. The model sets up the confidence level of 95%, or rather a level of significance, α = 5%. Confidence interval implies the range of values that occurs (1 – α) out of 100 trials and thus, are acceptable as the population parametric values (Gravetter & Wallnau, 2006, pp383). Hence, confidence interval and level of significance are the polar opposites of one another. Level of significance implies the probability value of committing a Type I error, i.e., the error performed due to rejection of the true null hypothesis (Triola, 2004, pp381). So, in this case, the confidence interval implies that range which contains those values occurring 95 out of 100 trials. If the computed t value of the parameter, b2, is larger than the critical t value at α = 5%, then the null hypothesis should be rejected at 5% level of significance and a conclusion that the regression is statistically significant would be made. Parallel evidence could be drawn through comparing the estimated p-value (probability value) of the parameter with that of the level of significance being assumed. If the estimated value is found to be lower, it implies a lower chance of committing a Type I error if the particular value is assumed to be true; hence, the corresponding null hypothesis can be rejected. Rejection of null hypothesis in this case, indicates when the exchange rate of CNY/HKD decreases, Hong Kong’s domestic export will rise. Chapter 3 - Procedure and methodology The current chapter accomplishes the empirical research work to establish the theory about a significant impact of exchange rate fluctuations on export performance of an economy. The region being considered here is Hong Kong SAR and the period that has been included in the study is between June, 2006 and October, 2009. 3.1 Data Source The data of Hong Kong’s domestic export have been collected from the Trade Analysis Department of the Census and Statistics department of Hong Kong; while, the exchange rates of CNY/HKD have been procured from the website of The People’s Bank of China. The research focuses on fluctuations arising between June 2006 and Oct 2009. The unit of domestic export value is one million and the unit of the exchange rate between Chinese Yuan and Hong Kong (CNY/HKD) is 1 Hong Kong dollar (HKD). 3.2 Data Collection As insinuated before, the present paper targets to evaluate the significance of the relationship between the volume of exports and the rate of exchange in context of Hong Kong. With regard to the objective of the paper and the null hypothesis framed before, the following details have been enlisted. 3.2.1 Data Variables The objective of the paper clearly suggests that there are two data variables to be used in the present context, namely, net volume of exports from Hong Kong throughout the world and the rate of exchange of Hong Kong dollars against the Chinese Yuan. The main destinations of Hong Kong exports are The Mainland of China, USA, Japan, Germany, United Kingdom, Singapore, Taiwan, India, Korea and The Netherlands. The total volumes of exports from Hong Kong to all the aforementioned economies as well as to other minor ones have been collected from the Trade Analysis Section of the Census and Statistics Department of Hong Kong. On the other hand, the data for the rate of exchange of 1 unit of Hong Kong dollar to that of the Chinese Yuan has been collected from the exchange rate archives of The People’s Bank of China. All these data points have been collected for the period lying between June, 2006 and October, 2009. However the fluctuations occurring between these periods are the only ones being accounted over here. 3.2.2 Population The population of data points consists of monthly and daily figures for both the variables, namely, volume of exports made by Hong Kong and rate of exchange between the two currencies. These statistics however, have been collected for the same period of time. Figures for the rate of exchange have been obtained on a daily basis since they tend to change every moment depending on their demand and supply throughout the global financial market. It is impossible to capture the daily ups and downs and thus the closing value for the traded currency (HKD, in this case), have been included. On the other hand, data figures for the volume of exports are monthly in nature, since it is almost impossible and costly to collect daily data for it. 3.2.3. Sample Though the data is available on a daily basis for one of the variables, it is not so for the other which is why the model has to make use of monthly data only. Data for export figures are unavailable on a daily basis which impedes the use of the daily figures available for the other variable. Hence, the sample consists of monthly figures for both rate of exchange and the gross volume of exports made from Hong Kong to all destinations throughout the world, minor or major. Though use of daily data implies a larger number of data points and an estimated model characterised with a high degree of precision, but unavailability of the same leaves no option but to carry on the analysis with the help of monthly data. However, there is no reason to believe that an analysis based on lower number of data points has a lower significance than that based on a larger number of observations. This is because, a minimum supply of 30 observations is necessary to yield a proper regression result (Reed & Swain, 1997, pp129). Provision of a higher number can only bring differences in the values of the estimated coefficients, but not in their estimated levels of significance so as to rule out or accept the null hypothesis. 3.2.4 Data analysis strategy The paper aims to find out whether there really exist a valid relationship between the volume of exports made by Hong Kong and the rate of exchange between the domestic currency of Hong Kong (Hong Kong dollar, HKD) and that of China (Chinese Yuan, CNY). Had the objective been to seek out any association between the two, the ideal statistical tool would have been a correlation analysis, where the degree of association could have been obtained. But, to find out the direction of relation between the two variables, the ideal way is to estimate a regression model. Running a regression helps to find out how far a particular variable is significantly dependent on the other. The model to be estimated in this case will be, Volume of Exports = b1 + b2 Rate of exchange (CNY/ HKD) Unit for the volume of exports is HKD Million while that for the rate of exchange is equivalent to the number of Chinese Yuan (CNY) exchangeable with 1 unit of Hong Kong Dollar (HKD). The observations which have been included while deducing the relation vary between June, 2006 and October, 2009. Here, the intercept (b1) and the slope coefficient (b2) are the parameters to be estimated, since the values which they are found to exhibit are the true indicators of the intensity of the relationship. The rule that should be followed while estimating the parameters of the model is that of Ordinary Least Squares. However, a mere estimation of the model cannot be proof enough about the degree of significance that the independent variables pose on the dependent one, especially when the estimation is based on a sample of observations. Certain tests are necessary to examine the estimated levels of significance of the coefficients. The ideal test to investigate whether the sample parameters significantly coincide to the values of the population parameters, the ideal test would be Student’s T – test defined as, Student’s T – Test = (β* - β0)/ se (β*) Where, β* = Estimated value of the parameter (coefficient) β and β0 = Value of the parameter β, according to the hypothecated value. se (β*) = Standard Error of β*. This statistic has to be compared with the tabulated value of Student’s t-distribution at the given degrees of freedom and assumed level of significance (Babbie, 2009, pp483). Degrees of freedom imply the total number of observations left free for the calculation of the parameters after calculating the primary parameter necessary to calculate the former. Usually, for Student’s T- Test, the degrees of freedom is equal to one less than the total number of observations. If the estimated value is found to exceed that of the tabulated one, then the corresponding null hypothesis is considered to be rejected at the assumed level of significance and vice-versa (MacDonald, 2007, pp80). 3.2.5 Research method There are many advanced software applications which might be used for conducting a linear regression. The one that could be used in the present context is SPSS, which is endowed with advanced tools not only for estimating the regression model, but also for calculating a number of other significant statistics. These statistics help to seek out how significantly the sample coefficients comply with the population values. Apart from Student’s t-statistic, there are others like F and correlation coefficient which come as a part of the regression results by default. All of them play different roles for analysis, but in the present case, the latter are omitted for the sake of simplicity. Coefficients(a) Unstandardized Coefficients Standardized Coefficients t Sig. 95% Confidence Interval for B B Std. Error Beta Lower Bound Upper Bound (Constant) 412383.484 125042.779 3.298 .002 159460.591 665306.377 XCHNGRTE -11941.042 133396.120 -.014 -.090 .929 -281760.163 257878.079 Dependent Variable: EXPORT The estimated regression model in this case is, Volume of Exports = 412383.484 – 11941.042 Rate of exchange (CNY/ HKD) (3.298) (0.090) Figures in parentheses are the estimated Student’s t-statistics. The coefficient of ‘Rate of Exchange’ has been found to be negative, implying that, higher the rate of exchange of HK dollars against Chinese Yuan gets, lower will be the export demand that they will face. The sign of the coefficient is logical enough, but the corresponding Student’s t-statistic is found to be insignificant. The degrees of freedom in this case is equal to (41 – 1 =) 40 and given the assumed level of significance equal to 0.05, the tabulated value of T-statistic is, 1.684 (for one-tailed test). Since, the absolute value of estimated Student’s t-statistic for Exchange rate is found to be 0.090, lower than the tabulated figure, the null hypothesis, H0 cannot be rejected at 5% level of significance. In other words, it implies that fluctuations in the rate of exchange create a negative or no impact on the dependent variable, Volume of Exports. However, one striking point over here is that the R Square value is found to be too low (0.000), implying that the predicted model is not at all a good fit. 3.3 Potential limitations The present study is featured with a number of limitations, met on account of the structure of the model or that of the theory on which the estimation procedure is based. A significant drawback in the suggested model is that related to the omission of significant variables from the model. The presence of those variables can lead to a better result in terms of a greater explanatory power of the estimated model. While, the single independent variable which has been considered in the present case is the rate of exchange, there are many others that are expected to bear significant explanatory powers. One such variable which bestows a significant impact on the dependent variable, volume of exports, is the level of income of the importing nation. In the international trade scenario, an export made by one country is identically equal to the volume of imports made by the other. Thus, if the level of income is quite high, it is expected that their demand for imports will be high as well. So, volume of exports is expected to have a strong positive relation with the income being earned by the importing nation. Similarly, if the level of domestic income is very high, the nation will be more inclined towards higher exports using its surplus produce (Blanchard, 2005, pp397). Concisely, the volume of exports made by a nation depends on three significant factors, Exports, E = f (e, Y*, Y) Where, e = Rate of exchange of 1 unit of exporting nation currency in terms of that of the importing nation, Y* = Income of the importing nation and Y = Income of the exporting nation. Another probable problem which might crop up in this case is that about the validity of linearity in relations. In real world, with a large number of factors affecting a particular variable, there rarely arises a chance of obtaining simple linear relationships between two variables. A linear relation implies a rather simple and clear-cut association between two variables, which usually is not found in reality. Hence, there are little chances of obtaining a significant linear relation in case of real economic variables (Gouriéroux & Monfort, 1995, pp304). In fact, there might be a non-linear relationship between them, but in such cases, OLS estimation cannot hold. References Babbie, E. R. (2009) The Practice of Social Research (12th Edition), pp483. USA: Cengage. Blanchard, O. (2005) Macroeconomics (3rd Edition), pp397. USA: Pearson Prentice-Hall. Fane, G. (2000). Capital mobility, exchange rates, and economic crises, pp170-172. UK: Edward Elgar. Fukasaku, K., Wall, D. & Wu, M. (1994) China's long march to an open economy, pp90. Paris, France: OECD. Gouriéroux, C. & Monfort, A. (1995) Statistics and Econometric Models: Testing, confidence regions, model selection, and asymptotic theory, pp304. Cambridge University Press. Gravetter, F. J. & Wallnau, L. B. (2006) Statistics for the Behavioral Sciences (8th Edition), pp383. USA: Cengage Learning. Jao, Y. C. (2001) The Asian financial crisis and the ordeal of Hong Kong, pp147. USA: Greenwood Publishing. Lei, C. K. & Yao, S. (2009) Economic Convergence in Greater China, pp201. London, UK: Routledge. MacDonald, T. H. (2007) Basic concepts in statistics and epidemiology, pp80. Oxford, UK: Radcliffe Publishing. Perry, M. (1999) Small firms and network economies, pp67. London, UK: Routledge. Reed, B. J. & Swain, J. W. (1997) Public finance administration (2nd Edition), pp129. California, USA: Sage Publications. Talentino, P. E. (2007) ‘Explaining multinational companies from the developing economies of East and Southeast Asia’ in Handbook of research on Asian business, pp416 by Yeung, H. W. (ed). London, UK: Edward Elgar Triola, M. F. (2004) Elementary statistics (9th Edition), pp381. USA: Pearson Education. Xueqiang, X. (1990) ‘Urban Development Issues in the Pearl River Delta’ in Chinese urban reform: what model now?, pp183-193 by Kwok, R. Y., Parish, W. L., Yeh, A. G. & Xueqiang, X. (eds). London, UK: M. E. Sharpe. Yiu-Chung, W. (2004) ‘“One Country” and “Two Systems”: Where Is the Line?’ in "One country, two systems" in crisis: Hong Kong's transformation since the handover, pp9 by Yiu-Chung, W. (ed). USA: Lexington Books. Zhang, K. H. (2003) ‘Foreign Direct Investment in China: 1979-2002’ in Asian Economic and Political Issues, Volume 8, pp15 by Columbus, F. (ed). New York, USA: Nova Science Publishers. Bibliography Baumol, W. J. & Blinder, A. S. (2008) Macroeconomics: Principles and Policy. USA: Cengage. Edgington, E. S. (1995) Randomization tests (3rd Edition). New York, USA: Marcel Dekker. Jaffe, D. (1998) Levels of socio-economic development theory (2nd Edition) USA: Greenwood Publishing. Swee-Hock, S. & Wong, J. (1995) Regional Economic Development in China. Singapore: ISEAS Publishing. Read More