Hong Kong must prepare itself for the age of the renminbi

The launch of the Shanghai-Hong Kong Stock Connect pilot programme is another important step in the renminbi's journey to internationalisation. Together with a programme for the mutual recognition of funds between the mainland and Hong Kong, which is hoped to soon follow, these steps will support a wider use of the renminbi globally as an investment currency.

This will quicken the pace of the opening of China's capital account, which will have significant implications for the country's financial market reforms.

Hong Kong enjoys a significant lead over other offshore renminbi centres. It has the largest offshore renminbi liquidity pool (over 1 trillion yuan, or about HK$1.3 trillion), a critical mass of talent and the necessary infrastructure. Currently, it processes 90 per cent of China's renminbi-settled cross-border trade, and has over a quarter of the aggregate worldwide quota for the renminbi qualified foreign institutional investors scheme.

Hong Kong also offers a broad spectrum of renminbi banking and financial services, and the widest choice of offshore renminbi investment products. A growing number of renminbi products offered in other centres are also packaged or managed out of Hong Kong.

Nevertheless, competition is heating up. London recently completed the offering of renminbi-denominated treasuries issued by the UK government. While these bonds were not issued under the renminbi qualified foreign institutional investors scheme, it is the world's first renminbi bond issue by a foreign government, a move that immediately jump-started the creation of offshore renminbi assets in the London market.

At present, markets such as London and Singapore, as the trading hub of the European Union and Southeast Asian blocs respectively, have a relative advantage over Hong Kong in the areas of foreign exchange, fixed income and derivatives trading.