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11 Jul 2013

Hong Kong and the RMB

Anita Fung

by Anita Fung

Chief Executive Officer, HSBC Hong Kong

Hong Kong skyline

Hong Kong is often the testing ground for the Chinese government’s experiments with its currency

Years from now, when people look back at renminbi internationalisation, they will agree that May 2013 was a significant month. According to the Hong Kong Monetary Authority (HKMA), May 2013 marked the first time that the volume of renminbi cleared under Hong Kong Monetary Authority’s Real-Time Gross Settlement system exceeded that of the Hong Kong dollar. For renminbi, daily turnover was 390 billion yuan (HKD494 billion); for the Hong Kong dollar, it was HKD487 billion.

Hong Kong is in an enviable position. Because of its historic and geographic ties with China, it owns a “first-mover” advantage

This latest milestone is significant on two fronts. The first is the process of RMB internationalisation.

Since offshore RMB business began in Hong Kong in 2004, China has heavily promoted the use of its currency in global trade and investment. In 2012, 12 per cent of China’s cross-border trade – amounting to CNY2.94 trillion – was settled in RMB. HSBC estimates that by 2015 the figure will jump to one third.

Likewise, RMB-denominated cross-border investment is on the rise. Since the launch of the first dim-sum bond, market issuance in Hong Kong has grown from CNY10 billion in 2007 to CNY276 billion in 2012. HSBC’s forecast for 2013 is in the region of CNY280 billion to CNY360 billion.

As RMB becomes more accepted as a global trade, investment and – ultimately – reserve currency, the volume cleared under HKMA’s Real-Time Gross Settlement system will only increase. The yuan (not fully convertible) has a higher daily turnover than the Hong Kong dollar (fully convertible). This is a sign that international adoption is already picking up. This milestone shows the yuan’s potential as China continues its currency reform.

The increasing volume of renminbi cleared in Hong Kong is also significant for Hong Kong and its status as the leading offshore RMB centre.

In the first half of 2013 two more offshore RMB hubs – Taiwan in February and Singapore in May – were established. Sceptics feared that Hong Kong would lose its lead. Encouraging data from the new hubs only reinforced the concerns.

On 11 June in Taiwan – just over four months after RMB business kicked off – yuan deposits surpassed CNY70 billion. In Singapore 53 transactions worth CNY1.61 billion were cleared on the day RMB business was launched.

But Hong Kong was not to be outdone. As of April, yuan deposits in Hong Kong were CNY677.2 billion; in the same month, Hong Kong settled 84 per cent of China’s RMB-denominated cross-border trade.

Hong Kong is in an enviable position. Because of its historic and geographic ties with China, it owns a “first-mover” advantage. Also, Hong Kong is often the testing ground for the Chinese government’s experiments with its currency.

Hong Kong’s list of “firsts” is extensive. It was one of the first areas outside mainland China covered by the pilot scheme for cross-border trade settlement; it is home to the first dim-sum bond market; and with the development of Shenzhen’s new Qianhai enterprise zone, it will soon become the first offshore participants in China’s domestic lending market since 1949.

It is because of Hong Kong’s special relationship with China that it should not view Taiwan and Singapore as threats. Rather, they should be collaborators. Offshore RMB business is still in its infancy, and considerably more can be achieved through cooperation. This is not a zero-sum game. One centre’s gain is not another’s loss. As the leading offshore centre, Hong Kong should take the initiative and work with Taiwan and Singapore, and any and all that may follow, to make offshore RMB business bigger. What is good for the yuan is good for Hong Kong.

At the same time that Hong Kong fosters greater collaboration with other centres, it should continue to develop new instruments that can contribute to further utilisation of the yuan around the world. Hong Kong has the largest RMB liquidity pool outside China. As of first quarter of 2013, the size of the pool (including deposits and certificates of deposit) was more than CNY800 billion. HSBC estimates the figure will increase threefold by 2015. This represents a huge demand for RMB products and services.

RMB internationalisation will continue, and Hong Kong will remain the leading offshore renminbi centre. Rather than worrying about losing our edge, we should help drive the yuan to become a global currency.

This article originally appeared in the South China Morning Post on 10 July.