Another milestone reached.
For a number of years, the Hong Kong Association of Banks (HKAB) has been kind enough to invite me to lead their delegation to Beijing to discuss with Mainland financial authorities matters of common interest. During one of these visits in November 2001, the delegation visited the State Administration of Foreign Exchange. At that meeting (without, I confess, prior consultation with HKAB and my staff), I raised for the first time the possibility of developing renminbi business in Hong Kong. Given the rapid economic development of the Mainland and the good progress of reform and liberalisation, I was convinced that the renminbi would, in the fullness of time, become an important currency in the region, if not the world. It was clear to me that if Hong Kong was to maintain its status as an international financial centre, as required in Article 109 of the Basic Law, we must, sooner rather than later, put Hong Kong in a position to handle effectively financial transactions denominated in the renminbi.
Not knowing what the reaction might be, I trod carefully and suggested that it seemed desirable, from the point of view of the Mainland authorities, for the increasing volume of renminbi banknotes circulating in Hong Kong to be appropriately channelled back to the Mainland and to have a mechanism to monitor the cross-border flows of renminbi. The response was positive. That marked the beginning of the development of renminbi business in Hong Kong. Obviously there is, as always, a need on the part of the Mainland authorities to be careful about financial liberalisation: the associated risks have to be carefully managed. We therefore proceeded step by step with meticulous preparation, all the time bearing in mind what we would like to achieve in the longer term – an ability to handle effectively all types of financial transactions denominated in the renminbi. So we spared no efforts in building in Hong Kong the most sophisticated financial infrastructure to support the renminbi businesses that have been gradually introduced and expanded. For example, we established a real-time-gross-settlement payment system for the renminbi early on, well before it was needed to cope with current levels of demand, in anticipation of the increase that we expected as renminbi business in Hong Kong developed.
Readers are aware of the introduction of renminbi deposits, remittances, exchange and credit cards in 2004, and the introduction of renminbi cheques and relaxation of relevant restrictions in 2005. 2007 saw the first issue of renminbi bonds in Hong Kong by Mainland financial institutions. Today we achieved another breakthrough when several ministries on the Mainland including People’s Bank of China, having obtained the approval of the State Council, announced the pilot scheme for the use of the renminbi in trade settlements. This is a development of strategic importance. If the designated firms on the Mainland and their trading counterparts in Hong Kong wish to settle their transactions in renminbi, they can do so. The use of the renminbi in trade settlement has to be supported by trade finance also denominated in renminbi. To my understanding we will have that from now on. This implies that the participating banks can now have on their balance sheets renminbi loans (although only those financing external trade with designated companies in selected locations on the Mainland). In addition, trade finance in Hong Kong denominated in renminbi has to be supported by the ability of the participating banks to obtain renminbi funds, and we will have that from what I understand, either through interbank transactions by the participating banks using available renminbi liquidity in the system, or through their access to the renminbi market on the Mainland, subject to certain limits set by the Mainland authorities. In other words, once the scheme is implemented, we will have a much wider scope of mobility of renminbi funds between the Mainland and Hong Kong.
Clearly, we should keep in mind that in exploring these new possibilities, there is always a need to proceed cautiously in financial reform and liberalisation. But what is important is that the supporting financial infrastructure will be further developed and Hong Kong will be even more ready to handle other types of transactions denominated in renminbi as they come along. Hong Kong will be the natural place for arranging these transactions outside of the Mainland. This is the key to the maintenance of the status of Hong Kong as an international financial centre.
Joseph Yam
2 July 2009
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