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| No.2 April, 2014 |
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Hong Kong's ongoing development as a global RMB centre |
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By C Y Leung, Chief Executive, Hong Kong Special Administrative Region |
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 Currency has always been a hot topic in Hong Kong. Go back 30 years, when the Chinese and British governments negotiated on the future of Hong Kong, the single most important question on the minds of businessmen and the people in the street was this: "What currency will be used after 1997 – the Hong Kong dollar or the Renminbi?"
The negotiations between the two governments concluded with the Joint Declaration in 1984 which says, amongst other things, that: “The Hong Kong dollar will continue to circulate and remain freely convertible.”
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The Basic Law, promulgated six years later, makes the same stipulation: “The Hong Kong Dollar, as the legal tender in the Hong Kong Special Administrative Region, shall continue to circulate.”
The co-existence of the Hong Kong dollar alongside the Renminbi is now part of our daily life. The two kinds of banknotes co-exist in the wallets of the hundreds of thousands of travellers who cross the boundary between Hong Kong and the Mainland every day. The two currencies also co-exist in the accounts of the numerous businesses based in Hong Kong. This is perhaps the most vivid illustration of “One Country, Two Systems” in action.
To us, the Renminbi is not just a currency. It has become a business, a big business, and a business that has huge potential. The rapid development of offshore Renminbi business illustrates how Hong Kong can put the principle of “One Country, Two Systems” to best use. We are uniquely placed to generate the double benefits of both “One Country” and “Two Systems”. And the benefits flow to the country as a whole as much as they flow to Hong Kong.
The principle of “One Country, Two Systems” allows Hong Kong to maintain its own financial system. Our fully convertible currency and free flows of capital are central to Hong Kong’s role as a testing ground for the liberalisation and the internationalisation of the Renminbi.
Mainland China is now the world's second largest economy, with GDP of US$9.2 trillion in 2013. It overtook the United States in 2013 as the largest trading nation, with the value of merchandise trade totalling US$4.2 trillion. Mainland China is also the world’s largest holder of foreign currency reserves, with US$3.8 trillion.
With the country’s economy continuing to expand at an enviable rate of around 7 per cent, there is little wonder that all eyes are on the rise of the Renminbi as an international currency.
In mid-March, the People’s Bank of China announced the doubling of the trading band for the Renminbi from 1 per cent to 2 per cent around the central parity rate, which is widely welcomed as a significant move to usher in the further liberalisation and internationalisation of the Renminbi.
Hong Kong is the premier offshore centre for Renminbi business, not least through its pioneering role in the development of offshore Renminbi business over the past decade.
Back in February 2004, Hong Kong became the first offshore location to provide Renminbi banking services primarily to personal customers. Later on, banking services were expanded and offered in full to the commercial sector as well.
By end-February 2014, the aggregate amount of Renminbi deposits and certificates of deposit in Hong Kong reached RMB1,128 billion – the largest pool of offshore Renminbi liquidity in the world.
The continued growth of Renminbi liquidity in Hong Kong and elsewhere has been the fundamental driving force behind further innovations in the offshore market, meeting the needs of individuals, enterprises and financial institutions for consumption, investment and capital requirements from around the world.
Apart from banking services, we extended the offshore business to cover our function as a Renminbi fund-raising and settlement centre. The first offshore Renminbi bond issuance took place in Hong Kong in 2007, followed by offshore Renminbi trade settlement in 2009. By the end of March 2014, 381 so-called “dim sum” bonds had been issued, with a balance of RMB350 billion outstanding.
Through this process, the Renminbi is establishing itself as a funding currency in the offshore market, with interest rates determined entirely by market forces. Renminbi trade settlement transactions handled by banks in Hong Kong reached RMB3,841 billion for the whole of 2013, a 46 per cent increase over 2012.
For cross-border investment, the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme was introduced in 2011, placing the Renminbi firmly on the map of investment currencies.
The RQFII scheme was expanded further in March 2013, bringing the total investment quota to RMB270 billion. Financial institutions that are registered and with major operations in Hong Kong can apply for RQFII status, while investment restrictions of RQFII funds have been relaxed so that institutions can design the proportion to invest in equity and debt markets in accordance with market conditions.
This has facilitated the development of more diversified Renminbi investment products. Subsequently, such RQFII quotas have also been offered to Taiwan, Singapore, London and Paris.
As a first mover in offshore Renminbi business, Hong Kong is happy to see the development of Renminbi business in different parts of the world. This represents more opportunities for Hong Kong to further develop its leading role in the internationalisation of the Renminbi and further sharpen our city's competitiveness as a financial super-connector linking our country and the rest of the world.
Premier Li Keqiang has announced the establishment of a Shanghai-Hong Kong stock exchange connectivity mechanism with the aim of promoting two-way opening-up and healthy development of the capital market in the Mainland and in Hong Kong.
We are grateful to the Central Government for its confidence in our financial system and its support to our development as the nation's global financial centre. The Shanghai-Hong Kong Stock Connect initiative will not only help strengthen the two securities markets, it will also have long-term and strategic significance.
It will reinforce and enhance Hong Kong's position as a premier international financial centre and leading offshore Renminbi business centre. The China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission are working together on the preparatory work.
I am confident that, as our country moves ahead with further reforms and opening up, Hong Kong will continue to play a unique and indispensable role in the process, while at the same time entrenching our position as an international financial centre.
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