Hong Kong’s ex-central banker calls for dual-currency stock prices to shield city from risks
Hong Kong’s former de facto central banker has proposed expanding the use of the Hong Kong dollar and the renminbi for trading equities on the city’s bourse, adopting a dual-currency system to ensure the local currency’s stability and protect the monetary system against global currency flows.
“It may be wise to make it conveniently possible for stocks listed in Hong Kong to be priced, traded and settled in the renminbi as well as in Hong Kong dollar,” according to a personal blog maintained by Joseph Yam Chi-kwong, the former chief executive of the Hong Kong Monetary Authority (HKMA). “This move would have the added advantage of easing the further internationalisation of the renminbi, in accordance with the declared policy objective of the Mainland. It would also enable banks in Hong Kong to manage their renminbi assets and liabilities more effectively.”
Currently, only two – Hui Xian Real Estate Investment Trust and Hopewell Highway Infrastructure – out of almost 2,000 stocks in Hong Kong are denominated in the Chinese currency.
Yam’s proposal -- not the first of its kind -- would add another element into the city’s ongoing search for its economic and financial identity two decades after the administration of Hong Kong’s affairs returned in 1997 to Chinese sovereignty from British colonial rule.
While Hong Kong’s affairs are ever so closely intertwined with the economy and politics of China, the city’s monetary policies have been tied since 1983 to the US Federal Reserve, through a currency board system that sets the Hong Kong dollar’s exchange rate at HK$7.8 per US$1.
The HKMA, of which Yam was its first chief executive for 16 years from 1993 to 2009, controls the local exchange rate by regulating the supply and demand of Hong Kong dollars. The local currency’s peg to the US dollar means the city’s monetary policy must move in lockstep with US policies instead of the People’s Bank of China.
Thus, when the US central bank cut interest rates to revive America’s economy after the 2008 financial crisis, the knock on effect was to flood Hong Kong’s financial system with low-cost money. Average residential property prices have surged 180 per cent in the city since 2008, making Hong Kong the most expensive urban centre to live and work in on the planet.
Hong Kong is already a fundraising centre for Chinese companies and foreign firms, which need to convert Hong Kong dollars raised here to other currencies, further adding to the foreign exchange risks to the city. The volume of capital flows may also increase if China further relaxes investment rules to allow for two-way flows of currency through Hong Kong.
“The domestic economy of Hong Kong is small. The volume of international financial activities conducted in Hong Kong and denominated in the Hong Kong dollar is huge,” Yam said. “It would be unrealistic to expect the currency system of an economy of seven million people to have the capacity to serve well the international financial activities between an economy of 1.3 billion people and the rest of the world.”
To provide a shield against the flows, Hong Kong should adopt the dual-currency system, seeing that the city already has the infrastructure to achieve real-time settlement of US dollars, euros and in the renminbi, he said.
Hong Kong Exchanges & Clearing (HKEX), which operates the city’s stock exchange, said its trading and clearing systems is already capable of working in multiple currencies, including the renminbi.
“The HKEX Listing Rules have no restrictions on which currency is used,” according to an exchange spokeswoman. Renminbi-denominated “products are subject to demand of issuers and the market. The denomination currency is issuers’ choice,” she said.
To be sure, the idea may not work simply because of the size of the available renminbi pool, at about 534.7 billion yuan (US$81.82 billion) at the end of July, according to HKMA data, equivalent to a week’s worth of daily transactions.
“This amount of renminbi in the financial system is not enough if there’s to be any initial public offerings of any major size, or if the daily stock market turnover” goes into overdrive, said Morton Securities’ chairman Joseph Tong Tang. “The yuan pool in Hong Kong is just not deep enough to support the settlement and it would create market risks to investors.”
The three-decade old currency peg, linking Hong Kong’s dollar to the most widely used global currency, has served the city well and has turned it into the financial centre that it is today because investors are used to using the dollar, Tong said.