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312.314

insight

Hong Kong as Offshore Renminbi Centre – Past and Prospects

(Translation)

Preface

    It was early summer, June 2003.  On the flight from Hong Kong to Beijing, there were only a handful of passengers. Their faces were covered with surgical masks.  Chang'an Avenue, a hustle and bustle district in Beijing, was apparently not yet fully recovered from the severe acute respiratory syndrome (SARS).  In the meeting room at the People’s Bank of China (PBoC), everyone was sweating all over, as the centralised air-conditioning was switched off to prevent spreading of the disease.  I still have in my mind a vivid picture of this visit to Beijing with my colleagues a decade ago.

2. Next week marks the tenth anniversary of the launch of renminbi banking business in Hong Kong.   While conducting currency exchange and investment in renminbi is pretty much a “fact of life” today, all this is not possible without the persistent efforts and hard work of a lot of people over the years. 

2004: Pioneering personal renminbi business in Hong Kong

3. The HKMA first raised with the PBoC the idea of introducing personal renminbi business in Hong Kong as early as November 2001, although substantive discussions only started in February 2002.  All arrangements had to be developed from scratch as the renminbi had never been used and circulated in any banking system outside the Mainland.  It took rounds of discussions among the HKMA, the PBoC and the State Administration of Foreign Exchange (SAFE), and the work went on despite the outbreak of SARS in March 2003.  A significant breakthrough was made during the meeting in June 2003, with consensus reached on major issues and the overall framework constructed.  Subsequently, the HKMA continued to iron out the details with the Mainland officials, and in November 2003, the State Council approved the introduction of personal renminbi business in Hong Kong.   That was then followed by three more months of preparatory work around the clock – drafting of legal documents (including the “Clearing Agreement” which is familiar to many), appointment of the Clearing Bank, establishment of payment system linkages and arrangements for cross-border renminbi cashnote delivery – banks in Hong Kong started to offer renminbi deposit-taking, currency exchange, remittance and debit and credit card services to personal accounts on 25 February 2004.

4. The scope of the renminbi business scheme introduced a decade ago was confined to the provision of services to personal customers and retail merchants, because the predominant objective was to facilitate economic and social exchanges between Hong Kong and the Mainland and to channel renminbi cashnotes in Hong Kong back to the Mainland orderly through the banking system.  Some aspects of the scheme were subsequently relaxed in 2005 and Mainland financial institutions were first allowed to issue renminbi bonds in Hong Kong in 2007.  During this initial stage of development, renminbi deposits grew gradually from RMB 12 billion in 2004 to RMB 54 billion in 2009. While the numbers seemed to be modest when we look back today, the underlying cross-border clearing and operational arrangements were indeed ground-breaking.  They not only created a channel for cross-border renminbi transactions through the banking system, but also laid a solid foundation for the burgeoning development of renminbi business in Hong Kong after 2009.

2009: Beginning of the development of Hong Kong as offshore renminbi centre

5. The introduction of the pilot scheme for renminbi cross-border trade settlement in July 2009 was a watershed as renminbi business in Hong Kong moved into its second stage of development.  It expanded from serving personal customers to enterprises and institutions, and transformed from just one-way repatriation of renminbi cashnotes to two-way flows of renminbi, marking a crucial step forward to the internationalisation of renminbi.  With the deepening of the use of renminbi in cross-border trade and investment activities since 2009, there have been more and more bridges linking the onshore and offshore markets, enabling renminbi to be increasingly used, circulated and accumulated in the overseas markets.  These developments have fostered the rapid and maturing growth of Hong Kong as an offshore renminbi business centre (as seen from statistics provided in Annex).  However, the journey was not entirely uneventful.

6. When the renminbi trade settlement pilot scheme was launched in 2009, it only covered five Mainland cities (Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan) and many operational arrangements, such as tax rebate for exporters, were not yet in place.  When I first led a Hong Kong Association of Banks delegation to Beijing in November 2009 and called on Vice Premier Wang Qishan, the PBoC and other financial authorities, the discussions focussed much on the development of renminbi cross-border trade settlement.  At the time, banks in Hong Kong were somewhat confused about the requirements for the new businesses in practice, while the cumulative amount of renminbi trade settlement transactions for several months was merely RMB 500 million.  A clear consensus from those meetings was that more work to facilitate the use of renminbi in trade settlement was needed.  In February 2010, the HKMA, having discussed with the PBoC, provided an important elucidation of supervisory principles and operational arrangements regarding renminbi business in Hong Kong, which set out two fundamental principles:  firstly, cross-border flows of renminbi funds into and out of the Mainland should comply with the rules and requirements of the Mainland, while the Mainland authorities and banks are responsible for verifying whether transactions undertaken by Mainland entities are in compliance with relevant rules and requirements;  secondly, with regard to renminbi funds that have flowed into Hong Kong, banks can develop renminbi businesses based on the regulatory requirements and market conditions in Hong Kong, as long as these businesses do not entail the repatriation of renminbi funds to the Mainland.  The Clearing Agreement for renminbi business was then revised accordingly in July that year, providing policy headroom and certainty for Hong Kong banks to further develop a full range of renminbi business.  These principles have remained applicable since then as a clear framework for the development of offshore renminbi business in Hong Kong.

7. In the second half of 2010, renminbi trade settlement activities began to take off.  There were, however, far more payments from the Mainland to Hong Kong than the other way round, because at that time only some 300 Mainland exporters were eligible to receive renminbi payments, while the float of renminbi in the offshore market was limited and expectation of renminbi appreciation was strong.  Against this backdrop, the conversion quota for offshore participating banks to purchase renminbi in Shanghai for trade settlement transactions was depleted in October 2010.  Some Mainland commentators thus queried whether the renminbi trade settlement scheme had become a channel for arbitrage and speculative play on the renminbi.  Some media reports even claimed that trillions of “hot money” was stockpiled in Hong Kong seeking ways to flood into the Mainland.  The circumstances then were rather unsettling for the renminbi trade settlement pilot scheme and the development of offshore renminbi business in Hong Kong. The HKMA, in close liaison with the PBoC, acted swiftly by activating the bilateral currency swap arrangement to alleviate the market tightness caused by the depletion of quota, while the requirements for cross-border renminbi squaring by banks for their clients were also set out more fully.  These measures led to steadier renminbi trade settlement activities, with reduced pressure of one-way purchase of renminbi by enterprises and more balanced payment flows to and from the Mainland.

8. While there is now general acknowledgment and support for Hong Kong’s positioning as an offshore renminbi business centre, this was not unquestioned at the onset.  Some Mainland academics thought that renminbi cross-border trade settlement was a universal policy and should not be taken as a measure to support Hong Kong.  Some others were concerned that rapid development of the offshore renminbi market could undermine Mainland’s financial stability.  The HKMA and the HKSAR Government therefore engaged in a series of discussions with relevant Mainland authorities.  Encouragingly, the Central People’s Government formally expressed support to the development of Hong Kong as an offshore renminbi business centre in the Twelfth Five-Year Plan promulgated in 2011.

9. By 2011, it became apparent to banks and market participants that there were very few uses in the offshore market for the renminbi funds originated from cross-border trade settlement besides keeping them as deposits. Headroom for renminbi lending and developing financial products was also limited.  There were however views on the Mainland that renminbi funds having flowed into Hong Kong and other overseas markets should stay offshore and should not, and did not have a need to, be repatriated back to the Mainland.  But in the absence of an economic or financial system with wide usage of renminbi outside the Mainland, practically it would not be feasible for renminbi funds to be intermediated entirely within the offshore market without any flowing back to the onshore market.  After extensive deliberations, it was then largely accepted that a certain degree of links between offshore and onshore markets is necessary. Ever since, channels for cross-border renminbi direct investments and portfolio investments (including arrangements for investing in the Mainland interbank bond market and the RQFII scheme) have been opened up and expanded over time.

Prospect for renminbi’s internationalisation

10. The internationalisation of renminbi, in my view, is a long and complex journey.  In what form and how quickly it goes very much depend on the policy steps taken by the Mainland on capital account liberalisation.  It is also driven by the dynamics between the evolving policy framework of China’s opening-up reforms and the market responses.  For instance, the scale of renminbi trade settlement activities will be subject to decisions of the trade counterparties based on their own cost and liquidity considerations.  Appreciation of the renminbi may increase the demand for the currency in the offshore market, although it would not be appreciating forever.  To become an international investment or reserve currency, renminbi asset and financial product markets of greater depth and breadth will be necessary for overseas entities to hold renminbi over the longer run.  Such development requires not just enabling policies but also promotion and innovation on the part of financial institutions.  This is a gradual and interdependent process, which cannot be achieved overnight.

11. Although it is difficult to provide a quantitative forecast of the size of the offshore renminbi market, I believe we can make some broad conjecture taking reference to the case of euro and Japanese yen.  Some studies have suggested that some 50%-60% of the euro area’s external trade is settled in euro, and the corresponding estimate for the yen is 30%-40%.  Currently, around 15% of the Mainland’s external trade is settled in renminbi, having risen from 2% in 2010.  As China continues its reform and further liberalisation of capital account and renminbi convertibility, there does not seem to be any particular reason that renminbi in the Mainland’s bilateral trade cannot reach that of the yen or the euro in five to ten years.  This means the percentage of trade settled in renminbi can be expected to rise to 30%-60% in the medium term, representing two to four folds of the current level.  As for the Mainland’s inward direct investments, the use of renminbi has increased from 5% in 2011 to about 20% at present, and it would be a reasonable conjecture that this could rise up to 50% in five to 10 years.

12. The development of the offshore renminbi market is both a prerequisite and an outcome of renminbi’s internationalisation.  The expansion of trade and investment transactions in renminbi will increase the size and liquidity of the offshore renminbi market.  On the other hand, the deepening of the offshore market will provide more incentive and scope for overseas enterprises and financial institutions to conduct business and financial transactions in renminbi.  The scale of the offshore renminbi market is still limited at the moment, with offshore renminbi deposits (around RMB1.5 trillion) only being about 1% of that onshore (around RMB100 trillion), which is much lower than the ratio of 30% of offshore vs onshore US dollar deposits.  Clearly, there is enormous scope and potential for the offshore renminbi market to grow in the foreseeable future.

Looking ahead: Great opportunities for Hong Kong as offshore renminbi centre

13. One may ask whether Hong Kong can maintain its leading position as an offshore renminbi centre as the renminbi’s internationalisation progresses.  While Hong Kong now accounts for 70% of the offshore renminbi deposits and payment transactions globally, I think Hong Kong will not, and should not, hold such a big share forever.  The internationalisation of the renminbi means the wider use and circulation of the currency in different parts of the world.  Businesses and individuals in different time zones have diverse needs.  If the scale of renminbi activities of overseas enterprises and banks remains trivial, they would have little demand for financing and correspondent banking services offered by Hong Kong banks.  In other words, it is unrealistic for one to expect a long-standing monopoly by Hong Kong on the world’s offshore renminbi business.  That would not be an ideal scenario for the renminbi’s internationalisation, nor would it be conducive to Hong Kong’s own sustainable development as an offshore renminbi centre.  After all, the opening up and facilitation of cross-border use of the renminbi is to serve the country’s needs for pursuing financial reforms and economic growth.  Hong Kong can play a leading and catalytic role in this process, and capture the unprecedented business opportunities that arise, thus achieving a win-win outcome for all concerned.

14. As a pioneer Hong Kong has indeed a decade of experience and solid foundation.  But our biggest and unique edge lies in our very close economic and business links with the Mainland.  Some 60% of foreign direct investment into the Mainland is originated from Hong Kong and more than 50% of the Mainland’s overseas direct investment is destined to or intermediated through Hong Kong.  Re-exports and offshore trade transactions conducted through Hong Kong also account for 30% of the Mainland’s external trade.  Supported by these links, Hong Kong’s offshore renminbi market has developed with greater size, depth and breadth, and such intrinsic advantage will not erode simply because of the introduction of renminbi business in other places.  But there is no place for complacency.  Nor can we lose faith in ourselves.   As everyone in Hong Kong keeps up with the efforts to strengthen Hong Kong’s renminbi business links with the Mainland and overseas, thereby entrenching our role as a global hub, I see very flourishing prospects for Hong Kong as an offshore renminbi business centre.

 

Norman T.L. Chan
Chief Executive
Hong Kong Monetary Authority
18 February 2014

 

Annex:

Offshore renminbi business in Hong Kong – Statistics

 

    2013

    2010

  Growth 
   between 2010 
   and 2013

Renminbi deposits (including outstanding certificates of deposit)

1,053.0

321.7

2.3 times

Renminbi trade settlement handled by banks in Hong Kong

(Total amount during the year)

3,841.0

369.2

9.4 times

Issuance of renminbi bonds
(Total amount during the year)

116.6

35.8

2.3 times

Outstanding amount of renminbi bonds

310.0

55.8

4.6 times

Renminbi loans

115.6

1.8

63.2 times

Average daily turnover of the renminbi real time gross settlement system

395.4

5.3

73.6 times

Average daily turnover of offshore renminbi foreign exchange market

(US$ billion equivalent)

20

Less than 1

20.0 times


Figures above are shown in RMB billion at year-end unless otherwise stated.

 

Renminbi deposits in Hong Kong (including outstanding certificates of deposit)

Renminbi deposits in Hong Kong (including outstanding certificates of deposit)

Last revision date: 18 February 2014
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