A currency union for Hong Kong and Mainland China?

This paper investigates the degree and the evolution of business cycle synchronization between Hong Kong SAR and Mainland China, as well as Hong Kong SAR and the United States with a two-step procedure. A structural VAR model is first set up to capture the dynamics of shocks to different regions. Then a state-space model is used to gauge the degree of symmetry of regional shocks, and to examine whether business cycles have been more synchronized over time. Our results cast doubt on the feasibility of a currency union between Hong Kong and Mainland China in the foreseeable future.