The increase in renminbi deposits is a natural market response and has limited monetary implications for Hong Kong and the Mainland.
Readers may have noticed that the amount of renminbi deposits in Hong Kong has been growing rapidly in recent months. At the end of February, it amounted to RMB 47.8 billion, an increase of more than 18% from the previous month, 58% over three months and 92% over a year. The March figures are not yet available but I am quite sure that they will show equally rapid increases. This development has attracted some attention, with interesting comments being made on the implications for the status of the Hong Kong dollar and monetary management on the Mainland. Let me try to put these numbers in a proper context.
There are three reasons for the rapid increase. First, the equity market has not been performing well. The bearish sentiment, hopefully short-term, has led investors to look for alternative homes for their savings. Bank deposits and debt instruments are of course the natural alternatives when equity is not doing well (with the Hang Seng Index having fallen by almost 30% from its peak at the end of October by the end of March). Secondly, the market has been expecting the renminbi to appreciate, given the increased flexibility in the renminbi exchange rate noted in the past few months. Thirdly, Hong Kong-dollar deposit interest rates have been falling along with US interest rates. As a result the interest premium (Hong Kong-dollar interest rates being higher than renminbi interest rates) that had existed since 2005, turned into a discount, with Hong Kong-dollar savings now earning only around 0.1% per year while renminbi deposit rates are around 0.5%, the latter being subject to the rate offered by the Shenzhen Branch of the People’s Bank of China to the renminbi clearing bank in Hong Kong (Bank of China (Hong Kong) Limited) under the scheme.
The RMB 47.8 billion in deposits at the end of February represents only 0.8% of total deposits and is equivalent to 1.7% of total Hong Kong-dollar deposits in Hong Kong. The rapid rate of increase reflects the small base. In terms of proportion, it clearly does not threaten the status of the Hong Kong dollar, as some have suggested. Hong Kong residents have made an investment choice, based on exchange-rate and interest-rate trends, although transaction demand for the renminbi by Hong Kong residents on the Mainland is also on the rise, given the continuing economic integration. This investment choice, involving more substantial switching of Hong Kong dollars into renminbi, has not led to any noticeable weakening of the Hong Kong dollar exchange rate, which has stayed at the strong side of 7.80 to the US dollar. The Hong Kong dollar, as mandated by the Basic Law, is legal tender in Hong Kong. Our salaries and daily expenses in Hong Kong are paid in Hong Kong dollars. Its legal-tender status is enshrined in the law, although the choice of currency for transactions in Hong Kong is a matter between the payer and the payee.
Readers may recall that renminbi deposits taken in Hong Kong are deposited with the People’s Bank of China, through the renminbi clearing bank in Hong Kong. This arrangement ensures that renminbi deposits in Hong Kong do not inflate the renminbi money supply on the Mainland causing difficulty in monetary management. To the extent that there are monetary implications for the Mainland, these take the form of greater demand for the renminbi by Hong Kong residents, putting further upward pressure on its exchange rate. But we are talking about very small amounts, compared with the total size of capital inflows into the Mainland. In any case, what is going on in terms of renminbi banking business in the free market of Hong Kong provides valuable information for the further reform and liberalisation of the financial systems on the Mainland, specifically the refinement of the mechanism for determining the renminbi exchange rate and the gradual move towards capital-account convertibility – both of which are declared policy objectives in the Eleventh Five-Year Plan and identified in 2008 as key tasks by the State Council.
Joseph Yam
24 April 2008
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