Further development of renminbi banking business in Hong Kong depends on the pace of financial liberalisation on the Mainland. But the banking system in Hong Kong should be prepared to take advantage of new developments.
During the recent visit by the Hong Kong Association of Banks to Beijing and Shanghai, which I had the pleasure of joining, one of the topics of discussion was the question of the further development of renminbi banking business in Hong Kong. Readers may recall the Financial Secretary's public comments on this subject a few weeks ago. In these comments he outlined three strategic directions. He hoped that this would assist all of us interested in the subject in working out specific proposals for further consideration. He emphasised that further development in this area crucially depends on the pace of financial reform and liberalisation on the Mainland. In working out specific proposals, we must therefore bear this overriding consideration in mind. The banking system and the other relevant components of the financial sector in Hong Kong should, at the same time, do our best to prepare for the inevitable changes that are likely to take place in the Mainland's financial system. This means ensuring that, in terms of our business strategies and our financial infrastructure, we are ready to take advantage of these changes.
This framework set out by the Financial Secretary was very much the basis of the discussion on the subject between Hong Kong's banking representatives and the Mainland authorities. The first of the three strategic directions outlined by the Financial Secretary involves building on the initiatives that have been successfully implemented earlier this year, namely, personal renminbi deposit-taking, renminbi exchange, renminbi remittance services and renminbi credit cards. These four initiatives in effect create, in terms of the balance sheets of banks in Hong Kong, assets and liabilities denominated in renminbi. As a modest and cautious start, the coverage of these assets and liabilities is quite limited. On the asset side there is only the renminbi deposit balance with the Bank of China (Hong Kong), which is the settlement bank and the conduit for the formal repatriation of renminbi, through retail deposits taken in Hong Kong, back into the Mainland. On the liability side there are only the personal renminbi deposits taken from individual Hong Kong residents. Strategically, we should build on these initiatives by exploring how renminbi assets and liabilities on the balance sheets of banks in Hong Kong could be diversified in a manner that is helpful, or at least without undermining, the relevant policies of the Mainland. On the liability side, for example, the diversification of deposits from just resident individuals to non-residents and non-individuals is a possibility. On the asset side, the trading of renminbi assets in Hong Kong could, with the agreement of the Mainland authorities, also be explored.
The second strategic direction is the most interesting and promising one. Current account transactions of the Mainland are no longer subject to exchange controls. For example, tourists from the Mainland are basically allowed free access to foreign exchange. Indeed, they can either buy Hong Kong dollars on the Mainland for spending here or, more conveniently, bring renminbi to Hong Kong for tourist spending, although there are various caps on the amounts involved. Free currency exchange can, of course, promote the underlying economic activities. A variation of this argument is that the freedom of choice in the currency denomination of the transaction can also have a similar, favourable effect. When there is such freedom, and if the two parties to the current account transaction agree, the transaction can be priced and settled in the currency they both prefer. The most important current account transactions are, of course, those of the import and export trade and there is quite a lot of this between the Mainland and Hong Kong. For the purpose of further promoting this important trade relationship, the use of the renminbi as the currency of trade between the Mainland and Hong Kong, where the trade partners prefer, could be explored. The financial infrastructure in Hong Kong will need to be suitably enhanced in order to cope with this, but given its present level of sophistication and the experience gained from constructing and operating payment systems of other currencies, this should not be too difficult.
The third strategic direction concerns the use of renminbi in capital account transactions between the Mainland and Hong Kong. The prospects for further development in this direction are obviously dictated by the programme of capital account liberalisation on the Mainland, and we must respect this. Financial stability is of utmost importance to the Mainland's economic development and, given our close relationship with the Mainland economy, for Hong Kong as well. But there could be specific areas in which relaxation could be cautiously introduced to assist in the testing or implementation of the liberalisation programme, and in strengthening or rationalising existing policies on the circulation and use of renminbi in Hong Kong. One specific area that has been suggested is the issue of renminbi bonds in Hong Kong. Depending on who the issuers and investors are, this could be structured in such a manner, for example, as to assist the repatriation of renminbi back to the Mainland and the diversification of renminbi assets of those banks in Hong Kong offering renminbi services.
The three strategic directions defined by the Financial Secretary provide a useful framework for further developing renminbi banking business in Hong Kong: they were certainly very useful during our recent meetings on the Mainland. The Hong Kong SAR Government will now study the subject further and will, in due course, put forward formal proposals to the State Council for consideration. It should, of course, be stressed that any new initiatives will take time and will not happen overnight. However, it is important that banks should position themselves, as far as possible, so that they can take advantage of any development in what must be potentially a major area of banking business in Hong Kong.
30 September 2004
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