Hong Kong vying for lead role as yuan trading hub

The city needs to bolster the range and depth of financial products on offer if it hopes to capture potential inflows

PUBLISHED : Wednesday, 02 December, 2015, 7:09pm
UPDATED : Thursday, 03 December, 2015, 1:13am

Hong Kong will need to introduce more yuan-denominated products to compete for some of the US$600 billion worth of yuan expected to flow into the city’s financial markets over the next five years, in the wake of the International Monetary Fund’s decision to anoint the currency reserve status.

The yuan accounts for about 1 per cent of global central bank reserves at present, but these holdings are expected to rise over time.

The IMF will add the currency to its Special Drawing Rights reserve currency basket on October 1 next year. The yuan will rank third in the basket, with a with a weighting of 10.92 per cent, placing it ahead of the Japanese yen (8.33 per cent) and British pound (8.09 per cent) and after the US dollar (41.74 per cent) and the euro (30.93 per cent).

Aidan Yao, senior emerging Asia economist of AXA Investment Managers, estimated the IMF, central banks worldwide and large pension funds or institutional investors will buy about US$600 billion worth of yuan assets over the five year period from 2016, or US$120 billion a year as a result of the yuan SDR inclusion.

“We think the SDR inclusion will raise the yuan’s profile as a global reserve currency, prompting central banks, sovereign wealth funds and reserve managers to allocate towards yuan-denominated assets in their portfolios. In addition, private investors, such as pension funds and insurance companies, will also likely seek exposure to the yuan as China opens up its domestic capital markets,” Yao said.

Tommy Ong, managing director of DBS treasury and markets, said many central banks would likely seek to invest in forex and bond markets in Hong Kong, even as Beijing has already allowed then to invest in the mainland interbank bond market since October.

“Offshore yuan traded in Hong Kong are cheaper than those traded in the onshore market. There are also yuan-denominated dim sum bonds issued in Hong Kong. These would be attractive to central banks worldwide because Hong Kong has an active forex and bond market,” Ong said.

BNP analyst Jacquline Rong said these institutions would likely limit their investment activities to the offshore yuan market as long as China has capital controls.

“There is a real and diverse market for offshore yuan. There is no possibility of the onshore yuan market being rolled up and be phased out of existence,” she said.

Jasper Lo Cho-yan, a director at Tung Shing Futures, said central banks trading yuan in the city would encourage retail investors to trade yuan in the forex market. “The yuan now represents only about 10 per cent of the forex trading in Hong Kong. After more central banks trade here, other retail investors will follow suit and help expand the forex market in Hong Kong,” Lo said.

Christopher Cheung Wah-fung, a legislator for financial services sector, said the IMF decision would push China to open up its capital account, including an expansion of its Qualified Foreign Institutional Investors (QFII) and yuan-denominated RQFII quotas for foreign investors.

“The Shenzhen and Hong Kong stock connect will also launch soon and hence encourage more international investors to trade mainland A-shares via Hong Kong,” he said. The Hong Kong stock exchange linked up with Shanghai Stock Exchange since November last year to allow cross border trading.

Ong said Hong Kong would need to do more if it wants to bolster its role as a yuan trading hub.

“The cental banks would be interested to buy dim sum bonds here but we have to provide sufficient high quality dim sum bonds. The stock exchange should also develop more yuan shares and yuan products listed on the local bourse for the central banks or institutional investors to trade,” he said.

Dim sum bonds are yuan-denominated bonds issued in Hong Kong. They represent 0.6 per cent of all yuan bonds issued. Onshore yuan bonds, also called as panda bonds, rank as the third-largest market worldwide behind the US and Japan.

Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said yesterday the local bourse would launch more yuan products in future.

Hong Kong Monetary Authority chief executive Norman Chan Tak-lam said in Shanghai yesterday that the pool of yuan assets in Hong Kong would continue to grow, buoyed by the inclusion of yuan into the IMF’s currency basket.

“Hong Kong will maintain a huge pool for yuan assets,” Chan said.

The chief executive also said that the Exchange Fund planned to increase holdings of yuan-denominated assets.

The Fund has used up a 60 billion yuan quota for investments in bonds on the mainland interbank market as well as a US$2.5 billion quota under the qualified foreign institutional investor (QFII) scheme, he said.

“In the future, the Exchange Fund will consider increasing buying yuan assets,” Chan added. “But the process will be at an orderly pace.”

Hong Kong faces pressures from Singapore, London and Paris, which already have a share of the international yuan trading market.