Renminbi business

inSight

04 Mar 2004

Renminbi business

The response to the launch in Hong Kong of personal renminbi services last week has been positive.

The offer of renminbi deposits and currency exchange services by banks in Hong Kong got off to a very encouraging start a week ago. It is a tribute to the meticulous planning and execution by the participating banks and the clearing bank that all went smoothly. Throughout the past few working days, the volume of deposits has, as expected, been building up at a comfortable pace, at least to us, having regard to our responsibilities over our own currency, banking supervision, the financial infrastructure and the status of Hong Kong as an international financial centre. There was no noticeable impact on the Hong Kong dollar, which weakened as a result of the strengthening of the US dollar against other foreign currencies and under the influence of the very low interest return for the Hong Kong dollar. The participating banks are coping with the new business prudently and competitively, and the necessary risk management systems are in place. The addition of the renminbi to Hong Kong's financial infrastructure, in however modest a manner, is of strategic importance to the maintenance of the status of Hong Kong as an international financial centre.

As at the close of business on Wednesday 3 March, the total amount of renminbi deposits outstanding was approaching RMB1.5 billion among the 14 banks surveyed by the HKMA. There are two main sources for these deposits. The first source is the renminbi cash already in the hands of Hong Kong consumers. As intended, a part of this is being channelled into the banking system and properly accounted for. There will, of course, still be the desire on the part of Hong Kong consumers to hold renminbi banknotes, but this is likely to be the relatively small transaction balances. The second source is the exchange of Hong Kong dollars into renminbi, either in anticipation of future spending requirements in renminbi or as an alternative avenue for keeping savings. Market rumours about the possibility of an appreciation of the renminbi exchange rate may also have been a motive behind the switch, but this is unlikely to be significant. In any case, yield differentials and expectation on exchange rate changes, whether justified or not, are relevant factors that influence decisions on portfolio reallocations. And we are quite sure that the manner in which renminbi deposits and exchange business are now organised is not conducive to currency speculation - the RMB20,000 exchange limit per person per day should be quite an effective deterrent.

There has also been healthy price competition for the business. The range of interest rates offered is quite wide to begin with, but this is expected to narrow gradually as banks, in the light of experience, become better placed to price the service. It will be interesting to observe this process of price (interest rate) convergence through free market forces in the absence of any cartel arrangement. Small differences will probably remain because of differences in the cost structures of banks and differences in the delivery of the financial product. Early indications suggest that depositors are not particularly sensitive to small interest rate differentials. On the contrary, non-price competition seems to have played a significant role - the dedicated renminbi savings passbook has become a favourite collector's item and is preferred over the additional renminbi entry in the established multiple-currency savings passbook, at least initially.

Readers may have noticed the orthodox view on the roles of money that I have often referred to, as a medium of transaction, a store of wealth and a unit of accounting. The currency denomination of money, particularly as a medium of transaction, may have an important bearing on the economic activities underlying those transactions, in that the provision of a wider choice in currency denomination may raise the level of those economic activities. This is perhaps an important but often ignored dimension in which the matter should also be addressed, on top of the purely financial business considerations. There is also a need to ensure that further developments or experiments in the use of the renminbi - still not a freely convertible currency - outside of the Mainland should not carry the risk of undermining the effectiveness of monetary policy in the Mainland and the stability of the renminbi.

 

Joseph Yam

4 March 2004

 

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Last revision date : 04 March 2004