Next five years 'key' to HK's yuan market
The next four to five years will provide Hong Kong with a critical window for it to grow its offshore yuan market, said leading economist Ba Shusong.
That is because the present global economic instability gives China a rare opportunity to promote the internationalisation of its currency.
But one of the major challenges Hong Kong faced in developing its offshore yuan market was a lack of financial innovation and yuan-related products, said Ba, deputy director general of the Financial Research Institute at the State Council's Development Research Centre, a think tank that reports to the cabinet.
'The remaining time for Hong Kong is quite limited - perhaps just four to five years - and then you will see the economy in Europe and the United States stabilise,' Ba said yesterday during a visit to the Chinese Financial Association of Hong Kong. The group includes many major mainland financial firms in the city.
'When the global economy is unstable, the demand for yuan expands greatly. That's why you see many foreign central banks have signed bilateral currency pacts with the People's Bank of China,' he said.
Ba, who often writes economic research papers for top mainland leaders, said Hong Kong should be more confident instead of opposing attempts by other cities - including Shanghai, London and Singapore - to take advantage of yuan-related business opportunities.
Some analysts believe these moves may threaten Hong Kong's leading position as a global centre for the yuan trade.
China and Britain agreed last year to co-operate on developing London into an offshore yuan centre. Since then, London has been speeding up its efforts in this direction, primarily to serve the European market. Singapore is doing the same, but mainly with an eye on the yuan trade in Southeast Asia.
Beijing has said it wanted to significantly boost trading volume in Shanghai's onshore capital and currency markets and turn the municipality into a global financial centre by 2020.
Ba said for Hong Kong to strengthen its position as a financial centre, it must offer more financial products in which yuan holders could invest.
'Bankers in Central should think harder about new and innovative yuan products. Hong Kong is a free market, so if your product is good, the market will prove it,' Ba yesterday told a small audience of financial professionals at a seminar held by the association.
Financial institutions have built up a pool of yuan deposits in Hong Kong that totalled about 560 billion yuan (HK$688 billion) in February, and have created investment products that include yuan-denominated bonds, known as 'dim sum bonds', which big multinational firms such as McDonald's and Ford Motor have used to raise capital.
But Ba said that was insufficient for Hong Kong to expand its offshore yuan market. Some traders expect yuan deposits in Hong Kong to reach 2 trillion yuan by the end of this year. However, this may now be difficult, partly due to reduced expectations for the further rise of the yuan.
Ba said that as part of the city's efforts to boost the supply of yuan-related services, bankers could pitch more yuan-denominated share listings in Hong Kong, and local firms could settle more of their business in yuan.
In April last year, the Hong Kong stock exchange welcomed its first yuan-denominated listing: Hui Xian Real Estate Investment Trust, backed by tycoon Li Ka-shing.
Since then, banks have pitched some potential yuan listings in Hong Kong, but none occurred, mainly because of weak market sentiment amid the worsening debt crisis in Europe and the slow economic recovery in the United States.
The estimated value, in US dollars, of daily spot yuan trading in Hong Kong last year, compared with US$680 million in London