The expansion of renminbi banking business in Hong Kong is a gradual process which must take account of implications for the convertibility of the currency and capital account management on the Mainland.
Readers will be aware of the announcement by the Chief Executive of HKSAR Government in his Policy Address on 12 October that the Central Government has agreed in principle to the expansion of renminbi business in Hong Kong. While a number of bankers have expressed disappointment to me over what they thought was the rather limited scope of the expansion, the new measures represent a small but progressive step in a gradual process towards the strategic goal. After all, it is only one-and-a-half years since the launch of renminbi business in Hong Kong. While I understand the bankers’ disappointment, I think we in Hong Kong must also appreciate the risks that too rapid financial liberalisation might pose to the stability of the financial system on the Mainland. While expanded renminbi business in Hong Kong will no doubt contribute to economic integration between Hong Kong and the Mainland and strengthen Hong Kong’s position as an international financial centre, it would also have implications for the convertibility of the renminbi and capital account management on the Mainland. At a time when so much is happening on the Mainland, it is understandable that the authorities feel a need to be cautious, particularly when, as I have quoted Deng Xiaoping many times before, finance is the core of a modern economy. And that core is not, at least not yet, a robust core. The all-important task of financial intermediation continues to be overly concentrated in and dependent upon a predominantly state-owned banking system.
But in being cautious, we should also guard against progress being undermined and opportunities being overlooked. The very efficient and diversified financial system of Hong Kong is the answer to the strengthening of that core – something that is of strategic importance to the Mainland if the strong economic growth and development there are to be sustained. There is a need for the very abundant domestic savings on the Mainland to be mobilised and effectively channelled into the hands of those raising money for their economic activities on the Mainland. Facilitated by modern information technology, financial intermediation, apart from retail banking, need not be organised on location. The capital markets, in particular the debt and equity markets, in Hong Kong should be used to serve the financial intermediation needs of the Mainland. I am not talking about the raising of foreign capital. Hong Kong is already the preferred place for doing that, to the extent that there is a need for it. I am talking about the mobilisation of domestic savings on the Mainland, either overseas (outward mobility of savings) or to Mainland entities needing to raise money. One important pre-requisite for Hong Kong to play this important role is that the financial system of Hong Kong must be able to handle transactions in renminbi – the currency of domestic savings and fund-raising on the Mainland. This is crucial to maintaining the status of Hong Kong as an international financial centre. We should work towards attaining that capability without delay, financial stability considerations on the Mainland permitting. This is why we will continue to talk to the Mainland authorities about further expanding the scope of renminbi business in Hong Kong, including the provision of banking services to allow cross-border trade to be settled in renminbi, and renminbi-denominated bonds to be issued in Hong Kong.
There is possibly also concern in some sectors about the rapid development of renminbi banking business in Hong Kong undermining the status and hence the stability of the Hong Kong dollar. The Hong Kong dollar, as prescribed in the Basic Law, is the legal tender of Hong Kong. It is the currency in which the great majority of our daily transactions are denominated. We are paid in Hong Kong dollars. We pay our household bills in Hong Kong dollars. The promotion of renminbi banking business in Hong Kong is to facilitate the orderly transaction of cross-border economic activities. The rationale is no different from that behind the capability that we have already built into the banking system for handling transactions in the major foreign currencies. It is true that the extent of our economic relationship with the Mainland is now considerably greater than that with either the United States or the euro zone. But legal tender is legal tender, and by law nobody can refuse to accept the freely convertible Hong Kong dollar in settlement of a transaction in Hong Kong, except when using small change to pay for a large amount. In any case, there is nothing mysterious about a currency. It functions as a medium of exchange, a unit of accounting and a store of wealth. Confidence in the currency is derived from the robustness of the monetary system and we have one of the most robust systems in the world, with the whole of the Hong Kong-dollar Monetary Base more than fully backed by foreign reserves. If there is a preference on the part of an individual to use the renminbi instead of the Hong Kong dollar in a particular transaction, it is probably because the counterparty to the transaction is from the Mainland. If there is a wish to store wealth in assets denominated in the renminbi, it is because the individual expects a higher rate of return, just as in the case of holding US dollar or euro-denominated assets.
Joseph Yam
20 October 2005
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