Relaxing yuan conversion limit can boost Hong Kong's role in offshore investment

Diana Cesar says move will buoy investors and boost currency's status

PUBLISHED : Monday, 16 December, 2013, 3:45am
UPDATED : Monday, 27 June, 2016, 11:50am

The renminbi is well on its way to becoming an international currency. Hong Kong has developed the largest renminbi offshore liquidity pool with retail deposits and cross-border trade settlement and is demonstrating sustainable growth.

The currency's stable valuation and steady appreciation are encouraging investors to include more renminbi products in their portfolios.

In Hong Kong, if locals want to deposit or buy renminbi-denominated investment products, they have to accumulate the sum required through a daily conversion of a maximum of 20,000 yuan (HK$25,000). There is a strong desire from locals to see this daily limit relaxed, as has been proposed by the Hong Kong Monetary Authority.

Renminbi currently makes up 11 per cent of Hong Kong's total deposits. These deposits rose by 7.1 per cent, to 781.6 billion yuan, in October from September. The pool of offshore renminbi in Hong Kong, including deposits and certificates of deposits, stood at over one trillion yuan in October. About 30 per cent of the renminbi customer deposits are held by personal customers, according to the HKMA.

The demand for renminbi investment products is growing among retail customers, according to our tracker survey this year. Almost one-third of Hong Kong respondents are interested in products using the renminbi as the underlying denominator. The general opinion is that the renminbi will continue its upward trend and they plan to invest more in renminbi products.

Apart from time deposits, there are various renminbi-denominated products offered by banks in Hong Kong including bonds, bond funds, structured products, exchanged-traded funds and stocks to meet different needs of retail investors. The product suite is expected to be enriched with the removal of the daily conversion limit as it provides more convenient means for individuals to buy yuan-denominated investment products, especially those with an investment amount exceeding the current threshold.

There are some concerns that expanding the conversion quota might lead to an overly rapid growth in the offshore renminbi pool, which would overshadow the Hong Kong dollar. The Hong Kong dollar remains the predominant currency used in payments and commercial transactions by local residents. And while a large shift from Hong Kong dollar deposits to renminbi deposits isn't expected, removing the daily conversion limit is more likely to allow retail investors to add renminbi to their currency portfolios.

The overall size of the offshore market has grown as fast as the variety and liquidity of the products. Offshore renminbi centres of the world must strive to develop products for offshore holders of renminbi to invest in. Hong Kong is leading the way for renminbi offshore markets, followed by London, Singapore and Taiwan in trade, financing and investment.

Removing the renminbi conversion limit could strengthen Hong Kong's role as the dominant offshore renminbi centre and increase the currency's circulation. This will be beneficial for its growing status as an investment currency.

The renminbi has already been convertible for trade or current account transactions for years. Strict foreign exchange controls apply on cross-border transfers of capital, direct investment, securities investment, derivative products and loans.

China is starting to introduce, through regulatory reforms, further liberalisation of the currency. The long-term goal is to achieve convertibility of the renminbi under capital accounts, and to gradually move to full renminbi convertibility.

Diana Cesar is head of retail banking and wealth management at HSBC in Hong Kong