New | Hong Kong vying for lead role as yuan trading hub
The city needs to bolster the range and depth of financial products on offer if it hopes to capture potential inflows
Hong Kong will need to introduce more yuan-denominated products to compete for some of the US$600 billion worth of yuan expected to flow into the city’s financial markets over the next five years, in the wake of the International Monetary Fund’s decision to anoint the currency reserve status.
The yuan accounts for about 1 per cent of global central bank reserves at present, but these holdings are expected to rise over time.
The IMF will add the currency to its Special Drawing Rights reserve currency basket on October 1 next year. The yuan will rank third in the basket, with a with a weighting of 10.92 per cent, placing it ahead of the Japanese yen (8.33 per cent) and British pound (8.09 per cent) and after the US dollar (41.74 per cent) and the euro (30.93 per cent).
Aidan Yao, senior emerging Asia economist of AXA Investment Managers, estimated the IMF, central banks worldwide and large pension funds or institutional investors will buy about US$600 billion worth of yuan assets over the five year period from 2016, or US$120 billion a year as a result of the yuan SDR inclusion.
“We think the SDR inclusion will raise the yuan’s profile as a global reserve currency, prompting central banks, sovereign wealth funds and reserve managers to allocate towards yuan-denominated assets in their portfolios. In addition, private investors, such as pension funds and insurance companies, will also likely seek exposure to the yuan as China opens up its domestic capital markets,” Yao said.
Tommy Ong, managing director of DBS treasury and markets, said many central banks would likely seek to invest in forex and bond markets in Hong Kong, even as Beijing has already allowed then to invest in the mainland interbank bond market since October.
