Hong Kong could spearhead China’s financial integration with world, digital yuan use: government officials

Whatever Hong Kong does to fulfil its role, it must serve China’s national strategic goal, says SFC’s Julia Leung
Undersecretary for financial services says city could be a hub for promoting China’s sovereign digital currency

US-China relations

Georgina Lee

Published: 7:00pm, 19 Jan 2021

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Hong Kong could play a leading role in easing China’s financial integration with the rest of the world amid Beijing and Washington’s technology and trade war, according to the city’s securities regulator.

Attempts by the Trump administration to decouple the world’s two largest economies had also cemented Beijing’s resolve to further expedite its financial integration with other economies of the world. This presented a “breakthrough” opportunity for Hong Kong, said Julia Leung Fung-yee, the deputy head of the city’s Securities and Futures Commission (SFC).

“We are on the cusp of [another] breakthrough amid the ongoing US-China technology and trade war. With its robust infrastructure, Hong Kong is in a unique position of playing the role as a connector [to China],” she told a panel discussion at the Asian Financial Forum on Tuesday.

The panel was looking at how the city’s asset management sector, which has US$3.7 trillion in assets under management and employs a sixth of Hong Kong’s financial services workforce, had weathered the past year under the coronavirus pandemic. All members agreed that the city’s financial markets had remained resilient thanks to its role in helping channel fund flows in and out of China.

But given its closed capital account, high on Beijing’s national priority was that any new connection or collaboration that Hong Kong sought to forge with China must not compromise the country’s financial stability, Leung said. The challenge for Hong Kong was that it must demonstrate its ability to ensure China would continue to have financial stability in the process of its liberalisation, she added: “Whatever Hong Kong does [in fulfilling its role], it must serve the national strategic goal [of China].”

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She praised the stock connect schemes and said they successfully showcased how Hong Kong served as China’s link to the world. Hosted by exchanges in the city and on the mainland, the mechanism allows mainland Chinese investors’ yuans to flow back to their onshore bank accounts right after the money has been cashed out from Hong Kong stocks, therefore preventing any leakage of yuan assets from China’s financial system.

“The connect schemes are underpinned by the close connection that Hong Kong has with Chinese regulators, and the close supervisory and enforcement cooperation [between them],” she said, adding that China could also opt to directly open up its financial markets without Hong Kong’s help.

Leung worked at the Hong Kong Monetary Authority (HKMA) for 14 years before joining the SFC in 2015. During her tenure at the HKMA, she was instrumental in getting Beijing to allow Hong Kong banks to offer limited yuan banking services in 2003.

Julia Leung Fung-yee, the deputy head of Hong Kong’s Securities and Futures Commission. Photo: Dickson Lee

Now the HKMA is conducting a pilot to test the digital yuan, a digital currency launched by the People’s Bank of China, in the city.

Joseph Chan, the undersecretary for financial services and the treasury, told a panel on Monday that Hong Kong could lead another breakthrough in China’s financial market opening and reforms with the digital yuan.

The digital currency, which has already been used in transactions worth more than 2 billion yuan (US$300 million) in pilots across various cities in mainland China, could be used by Hong Kong residents for spending within the Greater Bay Area development zone.

His comments echoed those made by Edmond Lau, a senior executive director at the HKMA, at Hong Kong fintech week in November.

“Hong Kong already handles over 75 per cent of global offshore yuan transactions, so the city is well-equipped as the financial centre in the Greater Bay Area to promote China’s central bank digital currency,” he said. The country is expected to be among the first few to launch their own digital sovereign currencies.

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