If a transitional period or parallel dollarization is destabilizing, can a modern financial economy “officially” dollarize overnight? My view is again “probably not”. The gist of the problems is not the supply of US dollar notes and coins, which can be arranged in confidentiality with the US Fed before hand (whether the Fed likes it or not is another story). It is rather that financial developments have drastically complicated everyone’s balance sheet, and an overnight shift of currency denomination would caused havoc.
Unlike a tiny economy dominated by cash transactions, there are all kinds of financial contracts denominated in the domestic currency that stretch our rights and obligations to a lengthy time horizon ahead. That is in the nature of a modern economy, not to mention an international financial centre like Hong Kong. People borrow mortgage loans and issue debt instruments in Hong Kong dollars at rates substantially different from the US dollar counterparts, whilst making various Hong Kong dollar investments for different rates of returns.
An overnight abolition of the Hong Kong dollar (which is what overnight dollarization means) will throw all our plans into chaos: some will gain, others will suffer, perhaps very significantly. The consequence is a huge re-allocation of fortunes and misfortunes. Any government that dares to engineer such an “overnight overhaul” must be a very brave one!”
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