Sample Research Proposal on The Effect of International Financial Law To the Development of Economic and MOnetary Policy of HongKong

Introduction             Government decision is two-fold in that it should ensure economic progress for public welfare while maintaining its culture from other nations.  These conflicting functions for the state enable it to initially guard its political boundaries but ultimately persisting to relax this aspect in order for economic boundaries to propagate its uncultivated land.  In analogy, this situation had affected how it manages its currency exchange and its valuation.  Governments created monetary and fiscal policies to control foreign investments and local activities for the greater good of its constituents.  Thus, a country shift from fixed to floating exchange rate system is popular global stories since each of them have individual interest to perform well economically reflected in Balance of Payments.    Background on Hong Kong Politics and Economy According to Lam (2003), the non-intervention policy of the Mainland regarding the economic activities is an indication of political indifference of HK people that ultimately give the region political stability.  In addition, political apathy gives HK the acknowledgement as one of the less restricted business area in the world[1].  In the contrary, Lam concluded that the definition of political indifference in HK requires further investigation to include the implicit factors like publicities generated by the media.  However, digging deeper to the issue through media reliance would not be available in the short-run because the 1999 challenges faced by HK media (e.g. Chan incident, false SARS news and photos of famous naked actress) are still lingering (Wikipedia 2006).  Not until these challenges are addressed, the extent of adverse impacts to credibility of the government-controlled media in Mainland and private-ownership media in HK may as well be comparable leading to further political indifference and stability.                                    Although HK already has political, cultural and economic independence from the Mainland and British authority, it remained under the direction of the Mainland in the aspect of military and foreign relations.  Due to this, it is quite rational to believe that HK is at the risk of military invasion but this is not discernable this early or until at least after forty years when the assured full autonomy given by the Mainland will lapse[2].  Being the second largest foreign direct investments (FDI) destination in Asia after China, the legal framework for contractual enforcement in HK is lucrative because there is a free flow of capital, clean government and adherence to international standards[3].  Further, the dependence of the region in China's trade relation contracts to other developed countries (e.g. USA) is not eminent when it comes to FDI because such Mainland's attachment occurs largely on exportation and importation operation or the tradable goods sector[4].               HK also became an FDI destination because of its low corporate income taxes which is comparatively lower in global standards[5].  However, as the region demands higher revenue performance from its taxation[6], corporate income tax can escalate in which the region can confidently apply without being anxious to the already established foreign businesses.  In the positive side, the region mitigates double taxation as the presence profit tax provokes the absence of capital gains tax[7]. As a result, foreign investors especially the shareholders can maximize their investments in both long- and short-term perspective.  Every hotel is required to expose their blueprints to local authorities (e.g. Department of Architecture) for inspection regarding safety standards which implicitly demands a global hotel company.                                           The economy of HK is currently under a strong GDP trend for more than two years wherein the foreign sector highly contributed especially due to high exports and imports[8].  Inflation is rising since 2005 that indicates that the purchasing power of HK consumers is increasing.  This is supported by the falling unemployment rate from 9% in 2003 to 4.7% in 2006.  Further, the economic autonomy of the Mainland for the region implies minimal intervention of government in the free market.  In addition, this advantage is intensified by the strengthening trade relations of HK and Mainland in which more companies of the former will be allowed to do business in the latter.  In effect, HK will be able to exploit the large market possibility from the Mainland that can result to continued increase in macroeconomic indicators (e.g. GDP, purchasing power and employment rate).               When it comes to stability of currency, HK dollar is pegged to US dollar[9] which makes the former sensitive to the national development and issues of the latter.  In the contrary, since 1983, the currency of HK is semi-fixed with the US dollar at HK$7.80 for every US dollar.  This makes HK currency less susceptible to US-based economic problems (e.g. terrorism effects, recession).  Aside from this, the strength of the currency is guaranteed by monetary authorities as only banks with equivalent US dollar reserves will be able to issue the counterpart HK dollars[10].  HK is a financial center and has expertise in financial, securities and related services that are world-class[11].  In addition, the potency of its financing capability is supported by gradual liberalization of financial markets in the Mainland that results in a closer relationship between them.  Additional source of expanding its finance sector is on gradual process.                      International Financial Law Issues The Case of China             It is the case of the already economic-awaken China.  By opening its doors to international commerce, its exchange rate system aroused concerns from the world commodity currency of United States Dollar.  Thus, the formerly fixed exchange rate Renminbi had to realize appreciation which is out of the conventional state-owned decision-making and policy.  The China's Central Bank is unwilling to accept command from the US, partly some of inherent protection to Western imperialism, rather chose to act according to its own will.  Due to this, it is slowly but indirectly granting the wishes of the commodity currency through seemingly adapting some features of floating exchange rate system.    Perhaps, one of the unchallenged consequences of international trade, floating exchange rate system ensures that the economic performance of a nation will be reflected through its own currency.  As in the case of the reincarnated China, foreign direct and portfolio investments serve as key contributors to its fast surging economy.  A lively-active market entails inflation which in turn increases the local demand for the currency of both consumers (to buy the products) and producers (to finance capital requirements).  Hence, as supply and demand law posits, its currency faces appreciation.   However, tagging the country as one of the best destinations of FDI, due to demand potential of its enormous consumers and labor-cost advantages, did little to tickle government authorities.  Emanated by 8.03 to 8.02 appreciation against the dollar, such minimal increase posted the highest gain of the currency since it began revaluing Renminbi to accord international market forces.  Can be viewed as highly conservative floating exchange rate system, it also recently allowed its major banks to reflect revaluation trends.  But why is China so conservative to embrace the "invisible hand" of currency valuation?  Is it purely political regimen to imply world power, protection of local producers/ consumers or simply adaptation flaws for a millennia-old centrally-planned form of governance?   Probably, China does not want risks to emerge abruptly parallel to its abrupt adaptation of floating system.  It can lead to inflation and adverse effects to balance of payments which the state cannot act on readily because national forces widened into complex and ever-changing international forces.  Rather the state wanted a smooth shift as it builds the necessary institutions to help its policies address the exchange rate issues in the future.  Thus, the gradual approach of China to freely float its currency in the international arena is preferred both for the benefit of its population and install supremacy of its government against other countries.  Local producers are given the time to obtain efficiency in its operations, as reflecting the US measure of the under-priced of Renminbi could mean more expensive export merchandise detrimental to its balance of payments.  In a similar way, consumers are provided with cues on what to expect to their wages and price level in the upcoming future, therefore, preventing public panic of any abrupt development.  Lastly, the state avoids its political ideals to be inflicted by other customs especially to affect the minds of its citizens.  This argument is concretized how the government created their own internet search engine to filter down political and "destructive" global information.        Effects of Floating Rate in the Balance of Payments             In the case of United States, allowing the market to determine its exchange rate implied stability of currency.  Since Bretton Woods, US government had started to interfere in foreign exchange to signal if the value of its currency is inconsistent with economic indicators.  However, starting 1990s, this intervention became minimal while floating rate seemed to correctly economic performance of the country.  A benefit from hands-off approach is that trading partner's confidence is enhanced regarding the price of US exports and in the same manner the latter payment for the former imports.  Trade is stimulated for the advantage of cross country exchange of goods and services.  As a result, the Balance of Payment in terms of current account for both of them is skewed in the positive values.             On the other hand, the lack of government intervention in currency value could discourage its labor to work abroad.  This can happen when a certain country who uses fixed system largely decreases the value of its currency for some economic purposes.  Without US retaliating its own version, labor would not be motivated to earn in that country that previously can be exchanged with more dollars when they go home.  The loose of motivation and turn-over of overseas employment would then reflect low unilateral transfers from worker remittances that would have been realized when workers abroad gives back a large portion of their foreign earnings to their home country.  In effect, this situation limit the capability of current account to increase, thus, also affecting the positive net gain of BOP.               Focusing on the capital accounts, floating system could undermine the real value of local assets, thus, accepting undervalued portfolio investments from foreigner-investors.  Without local government's intervention in currency valuation, regional clusters like Asian countries (Japan, China, Hong Kong, Korea, etc) could have cooperative effort to control the dollar in the international market as these countries are equipped with enough foreign currency reserves.  They can buy US stocks and could own US assets at undervalued price and could profit by selling these at a premium or when the period comes when the US government smells the collusion.  Until this recognition, capital accounts in securities and bonds are understated resulting to negatively skewed total of BOP.             Finally, official reserves like foreign currency reserves could also be inappropriately and inefficiently applied when needed in emergency situations.  When US will wait for a substantial change in dollar performance in the world market before the government will act on a threat of say, oil price hike announced by the Middle East, it could be too late to restructure its monetary policy as the market did not see what is in the eyes of the US government.  The tendency of the market to be complacent with inter-government relations, especially when conflict between countries are held in indirect and non-obvious way, will leave US without enough foreign currency reserve (preferably currency of Saudi Arabia or Iran) to hedge the conflict-led oil increase.  And simply, it will loose a lot of dollar that will put greater pressure to approach negative BOP due the outflows in trade payments.                Unlike other countries that replaced gold as their country's tool to influence their currency, United Kingdom remain to emphasize the holding of gold reserves instead.  In fact, it had auctioned gold accumulation.  The country invests in international holdings such as foreign currency assets to have more money to hedge undue fluctuations in the currency market.  With this, it operates just like US that it possesses some degree of control of its own currency while guarding its own from others.  This aim has substantial liquidity and prevents dependence from dollar instead to sterling have vast implications for the country and the trading partners with regards to BOP.               Since sterling is dependent from the performance a basket of currencies, economic recession or government intervention of a single or maybe a couple of countries that have no substantial effects to the market value of its currency.  Thus, UK BOP will continue to stabilize in current levels in an event that currency concerns of one trading country ensued.  If that country's currency appreciates, UK relations to other trading partners will not be affected because UK currency is stable.  Thus, BOP will not be shaken off substantially due to minimal looses of sterling to pay imports of that country.               However, these diverse international indicators adversely affect UK's ability to recognize currency problems in advance as it purely based its decision due to market results.  Unlike other developing countries like Philippines who is highly dependent to US currency performance and accepted its currency to be a term currency of the dollar, UK could slip to sudden currency trap that could have substantial sacrifice to its BOP.  Say an oil price increase is again initiated by Middle East suppliers; it has to determine the action of the majority of the countries before it acts.  On the other hand, Philippines will only have to obtain substantial feature of US policies and currency movements to be able to have the most logical, perhaps, strategic response to oil inflation.  As a result, emergency situations can bring huge current account outflows from the coffers of UK Treasury.  Undoubtedly, this fact could be one of the reasons why its government tries to own optimal value of foreign assets to hedge any currency fluctuations in the future.                Problem How Hong Kong adopt International Financial Law in its central bank decision-making?  What is the role of China, US or UK in its International Financial Law adoption?  What is the best strategy in addressing International Financial Law issues; namely, to internalize, to relate decisions from the three countries that have strong relation or to follow International Financial Law as it is?   Theory An underpinning theory relevant to the current study is the law of one price.  If Hong Kong will continue to peg its currency, the effect to overall economic and monetary regulation performance would be flattened in the long-run under the law of one price.    Method Desk research will be applied in building important issues concerning Hong Kong and the International Financial Law.  Questionnaire can be used in in-depth analysis of the problem from experts, students and citizens of Hong Kong.