The China money puzzle: will devaluation of the yuan help or hurt the Hong Kong dollar?

A Chinese yuan devaluation could affect the stability of the Hong Kong dollar. This paper studies two linkages. The first is that trade balance effect is studied through a computable general equilibrium (CGE) model. The result shows that the net change in Hong Kong’s foreign reserve after a yuan devaluation is, in fact, negligible. The second is that psychological effect is studied by a survey of financial market participants. In spite of the small trade balance effect, all respondents believe that a yuan devaluation would lead to a panic selling of Hong Kong assets. Therefore, a yuan devaluation is bad for the Hon