It was early summer, June 2003. On the flight from Hong Kong to Beijing, there were only a handful of passengers. Their faces were covered with surgical masks. Changan Avenue, usually a hustle-and-bustle district in Beijing, had apparently not yet fully recovered from severe acute respiratory syndrome. In the meeting room at the People's Bank of China, everyone was sweating, as the air conditioning had been switched off to prevent the spread of the disease. I still have a vivid picture in my mind of this visit to Beijing with my colleagues a decade ago.
Next week marks the 10th anniversary of the launch of renminbi banking business in Hong Kong. While conducting currency exchanges and investment in renminbi is pretty much a "fact of life" today, all this could not have been possible without the hard work of a lot of people over the years.
The Monetary Authority first raised with the PBOC the idea of introducing personal renminbi business in Hong Kong in November 2001. All arrangements had to be developed from scratch as the renminbi had never been used and circulated outside the mainland. It took rounds of discussions and the work went on despite the outbreak of Sars in March 2003.
A significant breakthrough was made in June 2003, with a consensus on major issues and the overall framework constructed. In November 2003, the State Council approved the introduction of personal renminbi business in Hong Kong and banks in Hong Kong began to offer renminbi deposit-taking, currency exchange, remittance and debit and credit card services to personal accounts on February 25, 2004.
The introduction of the pilot scheme for renminbi cross-border trade settlement in July 2009 was a watershed as renminbi business in Hong Kong moved into its second stage of development. It expanded from serving personal customers to enterprises and institutions, and transformed from just one-way repatriation of renminbi notes to two-way flows of renminbi, marking a crucial step forward to internationalisation of the renminbi.
Since 2009, there have been more bridges linking the onshore and offshore markets, enabling renminbi to be increasingly used, circulated and accumulated in overseas markets. These developments have fostered the rapid and maturing growth of Hong Kong as an offshore renminbi business centre.
Internationalisation of the renminbi is a long and complex journey. In what form and how quickly it goes very much depend on the policy steps taken by the mainland on capital account liberalisation. It is also driven by the dynamics between the evolving policy framework of China's opening-up reforms and the market responses. For instance, the scale of renminbi trade settlement activities will be subject to decisions of the trade counterparties based on their own cost and liquidity considerations. Appreciation of the renminbi may increase the demand for the currency in the offshore market, although it would not be appreciating forever.
To become an international investment or reserve currency, renminbi asset and financial product markets will need to be of greater depth and breadth for overseas entities to hold renminbi over the longer term. This requires not just the right policies, but also promotion and innovation on the part of financial institutions. This is a gradual and interdependent process, which cannot be achieved overnight.
Although it is difficult to provide a quantitative forecast of the size of the offshore renminbi market, I believe we can make some broad conjecture from the case of the euro and Japanese yen. Some studies have suggested that some 50-60 per cent of the euro area's external trade is settled in euros, and the corresponding estimate for the yen is 30-40 per cent.
Currently, around 15 per cent of the mainland's external trade is settled in renminbi, having risen from 2 per cent in 2010. As China continues its reform and further liberalisation of the capital account and renminbi convertibility, there seems no reason why renminbi in the mainland's bilateral trade cannot reach that of the yen or the euro in five to 10 years.
The development of the offshore renminbi market is both a prerequisite and an outcome of the currency's internationalisation. The expansion of trade and investment transactions in renminbi will increase the size and liquidity of the offshore market. The deepening of the offshore market will provide more incentive and scope for overseas enterprises and financial institutions to conduct business and financial transactions in renminbi.
The scale of the market is still limited, with offshore renminbi deposits only about 1 per cent of that of onshore, much lower than the ratio of 30 per cent of offshore vs onshore US dollar deposits. Clearly, there is enormous scope and potential for this market to grow.
One may ask whether Hong Kong can maintain its leading position as an offshore renminbi centre as internationalisation progresses.
While Hong Kong now accounts for 70 per cent of the offshore renminbi deposits and payment transactions globally, I think it will not, and should not, hold such a big share forever. The internationalisation of the renminbi means the wider use and circulation of the currency in different parts of the world. If the scale of renminbi activities of overseas enterprises and banks remains trivial, they would have little demand for financing and corresponding banking services offered by Hong Kong banks.
In other words, it is unrealistic to expect a long-standing monopoly by Hong Kong. That would not be an ideal scenario for the renminbi's internationalisation, or be conducive to Hong Kong's own sustainable development as an offshore centre. After all, the opening up and facilitation of cross-border use of the renminbi is to serve the country's need to pursue financial reforms and economic growth. Hong Kong can play a leading and catalytic role in this process.
As a pioneer, Hong Kong has a decade of experience and a solid foundation. But our biggest and unique edge lies in our very close economic and business links with the mainland. Some 60 per cent of foreign direct investment into the mainland originates from Hong Kong and more than 50 per cent of the mainland's overseas direct investment is destined to or intermediated through Hong Kong.
Supported by these links, Hong Kong's offshore renminbi market has developed with greater size, depth and breadth, and such an intrinsic advantage will not erode simply because of the introduction of renminbi business in other places. But there is no place for complacency. Nor can we lose faith in ourselves.
Norman Chan is chief executive of the Hong Kong Monetary Authority