This include RMB outflows through official aid, international loans by banks in China, foreign issuance of debt in Chinese markets, direct investment abroad, inter-company loans, repatriation of corporate profits, resident spending abroad and so on. Some of these are already happening. Offshore RMB balances in Hong Kong, Chinese Taipei and Singapore for example rose almost 40% between late 2013 and early 2014 to RMB1.4 trillion. These numbers are indeed encouraging, except for one thing. When the RMB is abroad, it gets homesick, terribly homesick. It yearns to return home to the land of its birth. When the legal avenues for it to do so are limited, it desperately seeks other ways to do so. And as the size of overseas RMB pool increases, the pressure of the homeward bound flows will also increase. Will the Qualified Investor Schemes, RMB clearing banks and the eventual introduction of the China International Payment System alleviate this situation of the offshore RMB? Yes, it would, but not entirely. In the current situation, despite the sharp increase in RMB related trade and investment transactions, the data I have seen suggests that the use of RMB remains rather lopsided and favours the flow of RMB into China rather than out of China. A significantly greater proportion of China’s exports were paid for in RMB, then its imports. Similarly, while 63% of the FDI into China was in RMB, only 16% of the direct investment out of China was in RMB.
And how far, in any case, would we be able to avoid importing US monetary policy even in the absence of the Link? The experience elsewhere in the region does not give ground for much optimism. The third question is how far the Link is fuelling deflation, and how far this is detrimental to our economy. Internal price deflation is indeed a part - and a necessary part - of the process of adjustment imposed on the economy under the Link when there is a fall off in external demand. It is also, incidentally, a feature of our longer-term economic integration with the Mainland of China. It is the counterpart of currency depreciation under a floating regime, except that the adjustments that it forces to take place tend to involve less overshooting, less instability, and more lasting restructuring. Price deflation brings pain to those who see the value of their assets shrink dramatically, and, as we know, there are many in Hong Kong who are, sadly, in this position. But there are many more who have seen their purchasing power increase, as prices for the whole range of goods and services steadily decline. And the effect, equivalent to that of devaluation, on adding to the attraction of Hong Kong as a regional centre, and as a destination for tourists, can only be positive. The concern comes when price deflation, as part of the adjustment process under the Link, turns into the kind of spiralling deflation that inhibits investment and fuels recession.