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Hong Kong needs to develop global network to maintain its leading role in yuan business

Monetary Authority chief says Hong Kong needs to develop a global network to maintain its leading role in the offshore yuan business

PUBLISHED : Tuesday, 18 February, 2014, 2:17pm
UPDATED : Wednesday, 19 February, 2014, 12:40am

Hong Kong must play an active role in developing an international network for cross-border business in the yuan if it is to maintain its leadership in a global market for the currency that could grow by 300 per cent over the next decade, Hong Kong Monetary Authority chief executive Norman Chan Tak-lam (pictured) said.

The head of the de facto central bank warned local lenders that any hopes of maintaining a monopoly in the offshore yuan business were futile.

Chan's warning came in an article published on the scmp.com website yesterday, a week before Hong Kong's banks mark 10 years since they were first allowed to conduct business in yuan for individuals.

"While Hong Kong now accounts for 70 per cent of the offshore yuan deposits and payment transactions globally, I think that Hong Kong will not, and should not, hold such a big share forever," Chan wrote.

Hong Kong banks had retained exclusive rights to conduct business in yuan since a decision by the State Council in November 2003 that boosted the city's economy, hit hard by the outbreak of severe acute respiratory syndrome earlier that year.

In July 2009, China began its campaign to internationalise its currency. First, firms were allowed to use the yuan to settle trades, then from 2010 to make yuan dominated investments.

But to realise the country's ambition of having the yuan used globally and ultimately as a reserve currency, since 2012 Beijing has allowed other financial centres, such as London, Singapore and Sydney, to enter the offshore yuan business.

However, Chan said, Hong Kong is so close to the mainland that "such intrinsic advantage will not erode simply because of the introduction of yuan business in other places".

At present, 60 per cent of foreign direct investment in the mainland flows in from Hong Kong, and 30 per cent of the mainland's exports are handled by the city.

"But there is no place for complacency. Nor can we lose faith in ourselves," Chan wrote.

"As everyone in Hong Kong keeps up with the efforts to strengthen Hong Kong's yuan business links with the mainland and overseas, thereby entrenching our role as a global hub, I see very flourishing prospects for Hong Kong as an offshore renminbi business centre."

He predicted trade settlement in the yuan, also known as the renminbi, will increase by 100 per cent to 300 per cent in the next five to 10 years and will match that of the yen and the euro.

That will mean up to 60 per cent of all mainland trade will be settled in yuan, from the 15 per cent at present.

"As China continues its reform and further liberalisation of the capital account and yuan convertibility, there does not seem to be any particular reason that yuan in the mainland's bilateral trade cannot reach that of the yen or the euro in five to 10 years," Chan said.

Christopher Cheung Wah-fung, legislator for the financial services sector, said the yuan has been widely used in trade but still has a long way to go to become an investment or reserve currency.

"China still has not opened its capital market widely. This discourages investors from trading in yuan products, while companies are also reluctant to launch yuan funds or yuan shares," Cheung said.

"If China wants the yuan to become an investment currency like the US dollar, it has to open its investment market further."

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From Beijing’s point of view, perhaps it isn’t really crucial whether there is ‘a long-standing monopoly by Hong Kong on the world’s offshore yuan business.’
According to the author of the book ‘Strategic Priorities’, yuan internalization has three stages:
[(one) early stage: easing of policies controlling capital flows, trade and direct investment flows. Quickly growing yuan offshore markets and Shanghai established as an international financial center.
(two) advanced stage: free circulation of capital, total liberalization of capital account, unconditional yuan convertibility.
Yuan offshore markets will have matured (possibly decline gradually from its peak).
Shanghai international financial center still developing.
(three) most advanced stage: yuan as one of world's reserve currencies, an active and stable yuan offshore market.
Well-developed international financial center in Shanghai.]
If China desires to reach phase two only, the yuan offshore market will be a short-lived market existing at most for 5 to 10 years, and will fade out gradually when Shanghai becomes a real international financial center.
If the author is correct , our finance officials should now plan ahead and diversify before it’s too late.
 
 
 
 
 

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