Hong Kong urged to expand its advantage in yuan trade

Finance industry experts say more effort needed to widen issuer base in offshore yuan market

PUBLISHED : Saturday, 12 April, 2014, 12:59am
UPDATED : Thursday, 17 April, 2014, 11:29am

Financial executives have urged Hong Kong to play a more active role in widening its issuer base in the city's offshore yuan market by leveraging its ample yuan deposits and the presence of institutional investors with strong understanding of the currency.

They believe the city's first-mover advantage in yuan trade can be expanded swiftly as Hong Kong is more than 10 years ahead of Western players such as London and Frankfurt that have only recently entered yuan settlement and clearing services.

"Hong Kong has a natural advantage in China's long-term goal of internationalising the yuan as the offshore yuan market, the so-called dim-sum bond market, remains a demand-driven industry," Au King-lun, the chief executive of BOCHK Asset Management, said in a Redefining Hong Kong panel discussion hosted by the South China Morning Post yesterday.

Watch: The Redefining Hong Kong Debate Series II

The so-called dim-sum bond market remains a demand-driven industry

With a different demand-supply dynamic, a price differential was created in Hong Kong, London and Taiwan, prompting more trading opportunities for active fund managers, Au said, suggesting the city should be more proactively bringing in new issuers from developed countries as the mainland's financial market opens up.

"Islamic finance is probably the new growth area for Hong Kong, where investors from the oil-rich countries in the Middle-East can raise yuan since trading activities in China have been growing substantially since the US vowed to reduce reliance on oil," Au said.

Bill Stacey, the chairman of think tank Lion Rock Institute, said investors in Hong Kong enjoy low costs in trading and exchanging multiple currencies, leading to a favourable position in global competition for yuan business.

With a steady foreign exchange rate regime, Craig Shute, a senior managing director at CBRE, concurred that as the gateway to China, Hong Kong has benefited much from mainland investors sitting on a pile of yuan.

However, Shute warned that a lack of urban planning on the part of the city government might pose a threat to commercial development and its prospects as the most vibrant financial hub in Asia.

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

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

London and Paris were each granted eight billion yuan (HK$10 billion) of offshore yuan quota to buy mainland stocks or bonds. Singapore obtained 50 billion yuan of similar quota last year.

Renminbi deposits and outstanding RMB certificates of deposits totalled more than one trillion yuan at the end of last year in Hong Kong, accounting for 70 per cent of the offshore pool of yuan liquidity.