HK plans ‘bridge building’ to boost offshore renminbi

Hong Kong— In its role as a testing ground for the internationalization of the RMB, Hong Kongis successfully building three bridges linking the onshore and offshore yuan markets, a senior Hong Kong official said.

“What we are trying to do here is to link the very big onshore market — the RMB-denominated (market) — with the offshore market,” said Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA).

Chan was speaking Friday at the China Daily Asia Leadershiap Roundtable on “Hong Kong's Visions and Strategies: RMB Internationalization”, which brought together five prominent financial and economic figures, who shared their views and insight on the yuan internationalization process with over 170 delegates from different institutions and organizations.

How has this link been established? By building three bridges: the “trade bridge”, the “direct investment bridge” and the “portfolio investment bridge”, the HKMA chief said.

The first bridge, the “trade bridge”, which has now been more or less completed, allows overseas companies to settle their trade with mainland partners in yuan.

And the “direct investment bridge”, which is being built substantially, allows foreign direct investment into the mainland with yuan raised from the offshore market. It also allows mainland companies to invest in overseas markets with onshore yuan capital.

 “I would expect more and more companies will make use of this new bridge to make investments into China,” Chan said.

Another bridge — the “portfolio investment bridge”, which is being built gradually, allows offshore yuan to enter into and be invested in the mainland's financial markets.

“We’re implementing those three bridges,” said Dicky Yip, executive vice-president of Bank of Communications Ltd. “We have customers crossing those three bridges everyday.”

With all the bridges gradually coming together, the next step for Hong Kongin developing into the “premier” offshore yuan business center is to boost its “traffic”. This essentially is the process of building a “critical mass”.

The concentration of financial products, market liquidity and financial intermediaries create inertia to conduct financial transactions through the established center, HKMA Deputy Chief Executive Peter Pang said of the “critical mass” during a speech in late September.

Hong Konghas the edge in this regard. “We have unique advantages being part of Chinaand being a very major commercial, trading and financial center ourselves,” HKMA’s Chan told the audience on Friday. “We also have the first-mover advantage in promoting the renminbi businesses in Hong Kong.”

“The real advantage of Hong Kongis the people in this room,” said Ronald Arculli, chairman of Hong Kong Exchanges and Clearing Ltd. “It is the likes of you. We operate bilingually, in Chinese and English.”

English is the international language of commerce and there are at least a billion and half people who speak Chinese, “so we have a very distinct advantage,” he added.

While these advantages and efforts of Hong Kongwill help promote the internationalization process of the Chinese currency, the pace of the process will still be largely determined by the central government.

The process of yuan internationalization is linked with the issue of opening of the capital account by the central government because this will provide the repatriation channel for the yuan to flow back to the onshore market, said R. Sean Craig, the International Monetary Fund's Hong Kongresident representative.

In addition to the capital repatriation channel, the capital account opening may also help the development of the market infrastructure for yuan investment products.

“For example, the development of yuan-denominated derivative market is needed to support more offshore yuan business in Hong Kong. The city also needs more credit risk analysis infrastructure with reference to yuan-denominated investment products to support local offshore yuan business. These financial infrastructures have to be dictated by the capital account opening in China.” Craig said.

However, Craig expects that the process of capital account opening will only be carried out smoothly as the process may bring unintended risks to the Chinese economy.

“Opening mainland capital markets requires heavy planning and incremental progress,” HKMA’s Chan said.

He Guangbei, the vice chairman and chief executive of Bank of China (Hong Kong) Ltd, is also looking at the process from a longer-term perspective.

“If you refer the full convertibility of RMB as the fact of that the currency can be exchanged into or back with other currencies and with a full capital flow, then I would say it will take a long long time. The short convertibility itself may, I say, sooner than people expected,” he said.