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Speeches

HSBC Client Event: “Taking Treasury to the Next Level”

by Vincent Lee, Executive Director (External), Hong Kong Monetary Authority

17 March 2016

Kee Joo, ladies and gentlemen,

I am delighted to join you this evening and to speak on treasury management. This might sound a little dry to the uninitiated, but it takes on a new dimension when seen through the title of tonight’s HSBC client event – “Taking Treasury to the Next Level”. It has been said that because of interest rate fluctuations, currency risks, and regulatory changes, the role of treasurer is now more important than ever. It is a fact that corporate treasurers face a complex environment in optimising their financial resources and managing risks.  

So, tonight, I’d like to share with you two important trends which are changing the way corporate treasurers do business. First, the increasing use of renminbi internationally, and secondly the growing trend for corporates to centralise their treasury operations through the establishment of corporate treasury centres, or CTCs, as we like to call them.

Progress of RMB internationalisation

The growing internationalisation of renminbi has been nothing short of phenomenal since it began in 2009.  Today, all direct investment into and out of China, as well as merchandise trade with the country, can be freely settled in RMB. 

We have also witnessed steady progress in the opening up of China’s capital account, in particular with the expanding channels for RMB portfolio investment and cross-border cash flows. And here, I would like to give you some examples of what has happened in such a short time –

  • The Shanghai-Hong Kong Stock Connect was launched towards the end of 2014, allowing international investors to invest in shares listed in Shanghai through the Hong Kong stock exchange, and vice versa.
  • The implementation of the Mutual Recognition of Funds scheme in July 2015, which allows eligible Mainland and Hong Kong funds to be distributed in each other’s market through a streamlined vetting process.
  • The continuous opening up of the onshore interbank bond market and foreign exchange market to overseas participants.
  • And, over the past 12 months or so, the Chinese authorities have announced new measures which are aimed at further facilitating cross-border cash management and financing activities in renminbi and foreign currencies.

Who would have imagined these developments just a few short years ago? And there’s more to come. In spite of the more challenging market conditions in recent times, the Chinese government has reiterated its commitment to opening wider to the world and accelerating the opening up of its capital market.  Underpinning this direction are several important developments:

  • First, is the inclusion of the renminbi in the IMF’s SDR basket.  This move will signify greater recognition of the RMB as a freely usable currency that is ‘widely used’ and ‘widely traded’, and boost confidence in the use of the RMB for economic and financial transactions in different parts of the world.
  • Secondly, Chinese financial markets have become more liberalised. For instance, earlier this year, the Chinese authorities further relaxed the Qualified Foreign Institutional Investor arrangement, and removed investment quotas for eligible overseas financial institutions to invest in the Chinese interbank bond market.
  • And, last but not least, the launch of the “Belt and Road” initiative, which is expected to attract numerous capital investment projects, create new opportunities for the use of the RMB and reinforce China’s increasingly important role in the region’s trade and investment activities.  In parallel, the establishment of the Asian Infrastructure Investment Bank will play an important role in financing infrastructure projects in Asia, thus leading to a more sustainable development of the region.

So, we might ask: why does the internationalisation of the RMB matter to corporate treasurers?

Let me quote from the Economist’s Asia Business Outlook Survey..…“In 2011, Western firms said that Asia contributed 19% of their global revenues.  In 2012, that figure rose to 22%.  By 2017, Western firms expect Asia to contribute 32%.  However, this will still be below Asia’s estimated 35% share of the global economy in 2017.” End of quote.  Increasingly, therefore, multinational corporations will find it not only an advantage, but a necessity, to trade more with their Asian counterparts, and to conduct the related financing, investment and hedging activities in the RMB.

We should also not overlook the important and growing trend of Chinese companies "going out".  With the continuation of RMB internationalisation and the Belt-and-Road initiative, Mainland corporates are “going-out” and expanding their trade and investment from the domestic market to the international marketplace.  These trends are driving a much wider international use of the RMB as a currency for trade settlement, financing and payments.  The increasing cash and capital flows in the offshore market will, in turn, lead to greater internationalisation of the RMB.

Given these trends, it is time for corporate treasurers to think carefully – if they have not done so already – about how they should improve their treasury operations to take advantage of this RMB internationalisation.

For our part, the Hong Kong Monetary Authority has played a central role in developing Hong Kong as the global hub for offshore RMB business.  And, at this point, I would like to introduce a few more facts and figures to clearly illustrate what is happening. Today, Hong Kong is easily the largest renminbi business centre outside the Mainland with a pool of some one trillion renminbi.  We are also the largest RMB financing and asset management centre outside the Mainland.  Our strategy in developing this business in Hong Kong is focused on strengthening our market infrastructure.

On liquidity, the HKMA has in place an RMB400 billion currency swap agreement with the People’s Bank of China which can be activated when market conditions warrant.  In addition, we’ve made available an RMB liquidity facility to banks which is currently offering intraday repos of up to RMB10 billion, as well as overnight funds on a T+0 basis and one-day and one-week funds settled on a T+1 basis.  We’ve also appointed seven banks as Primary Liquidity Providers and provided each with a bilateral repo facility of up to RMB2 billion.  These facilities help banks and their clients, like yourselves, to better manage RMB liquidity.

We’ve also worked with the industry to develop a CNH HIBOR Fixing, which supports the growth of the renminbi market by providing a financial benchmark for loan facilities and assisting in the development of RMB interest rate and credit products.  The fixing has increased the ability with which market participants can hedge the interest rate risk of their renminbi businesses.

Hong Kong has also developed a highly efficient renminbi clearing and settlement system.  Indeed, the average daily turnover of the RMB Real Time Gross Settlement system recently amounted to some one trillion RMB.  And, we will continue to enhance the system’s capabilities to keep pace with business growth.  Our system will complement the Mainland’s recently launched Cross-border Interbank Payment System, or CIPS, thus making renminbi business transactions even more convenient.

Ladies and gentlemen, you might recall at the beginning of my speech, I mentioned the growing trend of establishing CTCs. So, why is this happening?

Corporate treasurers face many other challenges these days.  Typically, corporates expanding their trade and investment overseas involve multi-location operations, multi-currency and cross-border supply chain management.  This situation applies equally to Western corporates expanding into Asia, and Chinese companies “going out”.  For corporates, the challenges create additional exposure to a broad array of risks, such as foreign currency risk, interest rate risk, counterparty risk, legal and compliance risk….and the risks go on. 

Compounding the challenge for treasury management is the regulatory landscape after the global financial crisis.  The capability of banks in providing funding and making a market for hedging tools has become more constrained due to deleveraging and the implementation of global regulatory reforms, in particular the Basel III requirements on capital and liquidity.  Increased market volatility has also made the raising of funds in the capital market more challenging.

Indeed, to stay ahead of the game, corporate treasurers need to ensure treasury functions can be tailored to better support international growth and capture the immense opportunities in Asia. At the same time there is a need to sharpen the management of capital, liquidity, funding and treasury related risks in a highly complex and fast-moving market environment.  In this context, a CTC, which is effectively an in-house bank, provides an ideal solution through centralising the management of liquidity, funding and risks arising from the operations of multi-national corporations in multiple jurisdictions.

Hong Kong as a CTC hub

I believe all of you here tonight recognise the advantages Hong Kong has as a CTC hub. And, I’m sure you’re well aware of our efforts in working closely with banks and MNCs to make Hong Kong a preferred location for setting up CTCs.  Indeed, it is our goal to capture, in particular, the high value-added segments of the CTC value chain, including cash and liquidity management, corporate finance activities and financial risk management.  By attracting more CTCs and corporate activities here, not only will we bolster our financial sector, but advance the headquarters economy of Hong Kong.

Therefore, it probably goes without saying, but I’ll say it anyway, the interests of MNCs and Hong Kong are very much aligned.  Having said that, we are fully aware of the strong competition among financial centres to become a CTC hub.  So, there is a need to understand our competitive position, amplify our strengths and double our efforts in areas where we can do more.

And, the Government is certainly playing its part in promoting the cause. In his 2015-16 budget speech, the Financial Secretary announced major changes to the tax regime that will make Hong Kong very attractive for MNCs to set up CTCs.

  • The interest deduction rules under the Inland Revenue Ordinance will be amended so that interest expenses arising from genuine cross border intra-group financing activities, under specified conditions, will be deductible.  This will resolve the “tax asymmetry” issue currently perceived by some MNCs as an impediment to their establishing or expanding CTC operations in Hong Kong.
  • And, qualifying profits derived from corporate treasury activities and transactions conducted by qualifying CTCs will benefit from a half-rate concession.  In other words, the applicable tax rate will be cut from the current 16.5% to 8.25%.  Broadly speaking, the scope of this concession encompasses corporate finance, liquidity management and risk management activities typically conducted by CTCs for their non-Hong Kong associated corporations.

Since the announcement, and following consultations with the industry, the Government introduced a bill into the Legislative Council last December to give effect to the changes.  And, it’s our target to have the bill passed by the middle of this year. 

Closing

One of the HKMA’s mandates is to develop and promote Hong Kong as an international financial centre. We believe with these latest refinements to the tax regime for CTC activities, together with our strengths and attractiveness as a global financial centre and in doing business with China, we will make Hong Kong the preferred location for multinational corporates to set up their CTCs. 

Ladies and gentlemen, I hope I haven’t overstayed my welcome, but as you can gather these are issues that are vitally important for Hong Kong and our continued development. Thank you. And I wish you all an enjoyable evening.

Last revision date: 18 March 2016
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