Hong Kong benefits from China's dynamism
Professor KC Chan, secretary for financial services and the treasury, government of the Hong Kong SAR
As mainland China continues to develop its capital markets, Hong Kong is well placed to pick up new cross-border trade and help facilitate the internationalisation of the renminbi.
Q: It is often said Hong Kong is the testing ground for China's capital account liberalisation, as seen in the pilot for the renminbi business here. Could you give us a little bit of background on the evolution of renminbi financial services in Hong Kong?
A: Hong Kong is the testing ground for renminbi convertibility. As early as 2004, the Chinese State Council approved the introduction of a narrow banking business in renminbi in Hong Kong, which became the first and by far the largest market where banks can conduct currency exchange, deposit-taking, credit card issuance and remittances services in renminbi for their customers. The scope of renminbi business was expanded in June 2007 with the issuance of renminbi bonds by mainland Chinese financial institutions.
Renminbi banking services expanded further to corporate clients with the introduction of the renminbi trade settlement pilot scheme in July 2009, which was greatly expanded in June 2010. Under the expanded pilot scheme, enterprises in 20 provinces and cities in mainland China can settle their trade transactions with the rest of the world in renminbi. The volume of such transactions has grown rapidly in recent months, with roughly 75% of settlement and associated trade finance business being captured by commercial banks in Hong Kong with sizable networks both on mainland China and in the rest of Asia.
Today, any company, including financial institutions, can open a bank account in renminbi, conduct currency exchange and borrow from banks freely, subject to availability of renminbi funds in the banking system here.
Q: What are the prospects for developing a renminbi financial products market in Hong Kong?
A: Hong Kong's banking system is playing a critical role in facilitating the cross-border trade settlement pilot and, in the process, capturing renminbi liquidity in Hong Kong. Renminbi deposits - which are still small - stand at about Rmb90bn [$13.2bn]. With expansion in the trade settlement pilot, we expect to see robust growth in such deposits. Adequate liquidity is crucial in developing a renminbi financial products market.
Our current focus is to develop a renminbi bond market in Hong Kong, which is the only market outside of mainland China that offers such a product. In addition to attracting more sovereign issues by the Chinese Ministry of Finance and by mainland Chinese financial institutions, Hong Kong recently saw the inaugural renminbi issue by a Hong Kong company, Hopewell Highway Infrastructure, with the funds raised used to finance a highway construction project in Guangdong province.
In August 2010, Haitong Securities launched the first renminbi fixed-income fund here, the world's first such product denominated and settled in renminbi. Additionally, several life insurance companies are now offering policies in renminbi. We are beginning to see a variety of products in renminbi coming to market.
Q: How would you see the future of Hong Kong as an offshore renminbi centre? How will Hong Kong serve as a testing ground for the internationalisation of the renminbi?
A: The internationalisation of the renminbi could become part of the move from a dollar-based international reserve currency system to a multi-polar system. Yet the pace of development remains to be seen. As part of the process of renminbi internationalisation, it is inevitable there will be growth in offshore renminbi financial services. This is partly due to the non-opening of the capital account, but that is not the only reason.
Offshore financial activities take place in all major currencies of the world, a feature of our globalised market. The role that Hong Kong plays in this development will again illustrate its unique status, located in China but operating an independent monetary and financial system integrated fully with the world's capital markets, and thus the ideal testing ground for renminbi convertibility.
Hong Kong is expanding its role as a financial centre as it strives to capture the offshore renminbi market
Q: There has been talk that with the gradual opening of mainland China's financial markets and renminbi internationalisation, Hong Kong's role as the gateway to mainland China will diminish, and the city's status as an international financial centre will be under threat from a rising Shanghai. What are your thoughts?
A: Hong Kong will play a very important role in the process of opening of mainland China's financial markets and renminbi internationalisation. In mainland China, the domestic liquidity grows along with the real economy and Shanghai has the most important task of fulfilling the financial intermediation role in the domestic economy. Hong Kong, however, has a long history of playing host to international liquidity - and managing risks arising.
Hong Kong is open to all investors, international and domestic, with no restrictions on capital flows. We are open to all issuers raising capital in Hong Kong, in equity and other forms of financing. Our regulatory structure is designed to facilitate this intermediation. Hong Kong will play a strong role in meeting the international financial needs of Chinese investors and companies. The anchoring and management of risks in Hong Kong provide monetary and financial stability for the continuous economic growth of our nation.
An offshore renminbi market anchored in Hong Kong will facilitate the internationalisation process of the renminbi.
This process will inevitably lead to more openings in the onshore capital market. The offshore market will naturally complement the onshore market for the market as a whole to function. Shanghai and Hong Kong are the twin engines on the aircraft, together propelling the process of renminbi internationalisation.
