The issue of renminbi-denominated bonds in Hong Kong is part of a bigger picture for both Hong Kong and the Mainland.
On 8 June the People's Bank of China and the National Development and Reform Commission jointly published the "preliminary management arrangements for Mainland financial institutions issuing renminbi bonds in the Hong Kong Special Administrative Region". Amendments to the settlement agreement between the People's Bank of China and the Bank of China (Hong Kong) Limited as the settlement bank for renminbi in Hong Kong, and those between the settlement bank and the participating banks in Hong Kong, have also been finalised. These clear the way for the first issue of renminbi-denominated bonds in Hong Kong, hopefully by the end of this month.
We in the HKMA are very excited about this, given that we have been working hard on it for some time. Quite a lot of work is involved, notably the upgrading of the financial infrastructure to support the primary and secondary markets for renminbi bonds. In particular, the infrastructure will also facilitate the development of a repo market, and retail investors will be able to use renminbi cheques or bank transfers to settle payments relating to the subscription and trading of renminbi bonds. Readers following this subject will have noticed the completion of the Real Time Gross Settlement payment system for the renminbi back in February. Apart from seeing our efforts come to fruition, the level of our excitement is elevated by the strategic significance of this from the point of view of the maintenance of Hong Kong's status as an international financial centre and facilitating financial reform on the Mainland.
Perhaps these points of view are not immediately obvious. After all, the amount of renminbi deposits in Hong Kong that could be used for purchasing renminbi bonds, though growing, is not large; the latest figure being about RMB25 billion. It will be quite a small market, at least to start with, although the infrastructure supporting it will be quite a sophisticated one. Secondary-market activity may also be quite slow at first, given that investors with renminbi to put into the bonds – the depositors with renminbi and banks that have taken renminbi deposits – may wish to buy and hold for interest income and exchange rate appreciation gains. But I hope these developments, which are likely in the early stages, will not be seen as a disappointment.
What is important, at least to us in the HKMA, is that, after increasing the capability of the banking system of Hong Kong to conduct banking business denominated in the renminbi, albeit of limited scope so far, the Hong Kong debt market will now be able to handle primary issues and secondary-market trading in debt instruments denominated in the renminbi. Our financial system is therefore now able to handle renminbi-denominated activities in two out of the three channels of financial intermediation – banking and debt. Further, with the renminbi included alongside the Hong Kong dollar, the US dollar and the euro, among the currencies our financial infrastructure is able to handle, it will also be possible for the equity channel to follow suit; in other words, for share listing and trading to be denominated in renminbi, if there is demand.
And I am quite sure that there will be a general demand for the use of the renminbi in financial transactions, as the reform and liberalisation of the Mainland financial system progress further. The Mainland is now the fourth largest economy and the third largest trading partner in the world. In the region, it is already the second largest economy and the largest trading partner. Given the rapid economic growth and the appreciating currency, these rankings for the Mainland can only move up over time. And, as I have said in this column before, I have no doubt that the currency of such an economy will become a major currency in the region and the world, and in the fullness of time a reserve currency as well. Put simply, there will be more and more international trade and financial transactions conducted and settled using the renminbi. As the international financial centre of China, Hong Kong must be prepared for this and must position itself to play a key role, and this means wasting no time in increasing the capability of our financial system to handle financial and other transactions denominated in the renminbi.
While our plan is clear, a restraining factor in our development is of course the existing exchange controls on the Mainland, regarding both the mobility of money in and out of the Mainland, in whatever currency, and the convertibility of the renminbi against other currencies. But I am confident that exchange controls on the Mainland will gradually be removed. This is obviously in the interest of the Mainland. And in particular areas this may come faster than we expect. With inward mobility of capital so far much less restricted than outward mobility, and with the growing balance-of-payment surplus now very politicised, creating problems for monetary and exchange-rate management that have implications for economic, financial and even social stability, the relaxation of capital outflow has become a priority. There is, of course, great emphasis on controllability, gradualism and keeping the initiative in such reform. This translates into a need for controlled experiments. And where better to do this than in Hong Kong?
Joseph Yam
21 June 2007
Click here for previous articles in this column.
Document in Word format
