Development of Offshore Renminbi Business in Hong Kong: Review and Outlook

(Translation)

Remarkable progress has been seen in the development of Hong Kong as the offshore renminbi business centre in recent years.  It can be said that many milestones have been achieved, from the launch of renminbi business in Hong Kong back in 2004, to the introduction of the pilot scheme for cross-border trade settlement in renminbi in 2009, and further to the increasing maturity of the offshore market observed recently. I would like to take this opportunity to provide a brief review of the development so far.

Looking back, when the pilot scheme for renminbi trade settlement was introduced more than three years ago, not much business was conducted since it only covered five Mainland cities and some of the operational arrangements, such as in relation to export tax rebate, were not yet in place.  In the first six months since the introduction of the pilot scheme, the total amount of renminbi trade settlement handled by banks in Hong Kong was less than RMB2 billion, or a monthly average of merely RMB0.3 billion to RMB0.4 billion.  Until 2010, as the renminbi trade settlement scheme was expanded, there was then a notable growth in the transaction volume.  However, with only some 300 Mainland enterprises eligible for using renminbi to settle their exports at that time, a limited amount of renminbi liquidity in the offshore market, and relatively strong market expectation of renminbi appreciation, the amount of renminbi payment flows from the Mainland was larger than the flows to the Mainland.

Increasing depth and breadth of Hong Kong offshore renminbi market

In 2011, China’s Twelfth Five-Year Plan promulgated the policy of promoting the wider use of renminbi in cross-border transactions and supporting the development of Hong Kong as the offshore renminbi business centre.  With the subsequent expansion of the Mainland exporters eligible to settle their trade transactions in renminbi and more two-way movements in the renminbi exchange rate, the payment flows to and from the Mainland turned more balanced.  At the same time, Hong Kong’s offshore renminbi market was also gradually taking shape.  Renminbi deposits in the offshore market experienced a period of rapid growth, from RMB63 billion at the beginning of 2010 to RMB550 billion in the middle of 2011.  Against this backdrop, it became apparent that avenues for the use of offshore renminbi funds were limited and that the mere outflows of renminbi from the Mainland would not bring about a greater use of renminbi in cross-border transactions and internationalisation of the currency.  But rather, there will be a need to provide effective channels for the flow and circulation of renminbi funds between the onshore and offshore markets.

A series of measures were introduced by various Mainland authorities subsequently, including the further expansion of the renminbi trade settlement scheme and the introduction of the arrangements for inward and outward direct investments in renminbi and the renminbi Qualified Foreign Institutional Investors (RQFII) scheme.  Supported by these measures, the development of offshore renminbi business in Hong Kong gained significant momentum in 2011.  Renminbi trade settlement handled by banks in Hong Kong reached nearly RMB2 trillion and the total issuance of “dim-sum” bonds exceeded RMB100 billion.  A wide range of renminbi financial products, such as investment funds and insurance products, were also launched in the market.

Moving into 2012, the development was underpinned by the growing maturity of the offshore renminbi market in Hong Kong.  Renminbi trade settlement handled by banks in Hong Kong reached RMB2,632.5 billion, up 37% from 2011.  The renminbi “dim-sum” bond market continued to be active.  Total issuance in 2012 amounted to RMB112.2 billion and the outstanding amount of dim-sum bonds reached RMB237.2 billion, representing a 62% increase compared to the amount at the end of 2011.  Renminbi bank lending grew at an even more remarkable pace, with the total amount of outstanding renminbi loans having increased by 157% from RMB30.8 billion to RMB79.0 billion during the year.  The amount of customer deposits and the outstanding amount of certificates of deposit issued by banks totalled RMB720.2 billion at the end of 2012, up 9% from RMB661.6 billion at the beginning of the year.

The daily turnover (including spot and forward transactions) in the Hong Kong offshore renminbi foreign exchange market has reached US$5 billion equivalent.  Major banks are also offering direct foreign exchange quotes of RMB against GBP, Euro and other major Asian currencies.  Renminbi financial products have become more diversified, with renminbi A-share exchange traded funds (ETFs), renminbi futures and renminbi equities launched in the market.  For instance, the total market capitalisation of the four renminbi A-share ETFs has exceeded RMB40 billion.

All these figures indicate that there has been an increasing depth and breadth of the offshore renminbi market in Hong Kong.  While the growth of renminbi deposits in Hong Kong is not as rapid as before, it is not a stagnant but a sustained pool of liquidity generated by market forces and is supporting a large volume and variety of renminbi financial intermediation activities.  For example, shortly following the introduction of renminbi cross-border lending arrangement in respect of Qianhai at the end of last year, the first batch of loan agreements were signed at the end of January by 15 Hong Kong banks, involving a total amount of some RMB2 billion.  The arrangement not only expands the use of offshore renminbi funds in Hong Kong, but is also conducive to the overall development of offshore renminbi business in Hong Kong.

Entrenching role as the global hub for renminbi business

With the growing use of renminbi in cross-border trade and investment activities, there is an increasing demand for renminbi financial services by overseas enterprises, and it is natural for renminbi business to be developed in other financial centres.  On this, Hong Kong keeps an open mind and will stand up to competition.  Since 2011, the HKMA has been conducting roadshows overseas  to showcase Hong Kong as the offshore renminbi business centre. We have also established collaboration with London and Australia, with an aim to assist and facilitate financial institutions and corporates around the world to expand their renminbi business while promoting the use of Hong Kong’s renminbi financial platform, either directly or indirectly, to settle their transactions.  This will not only enable Hong Kong to play a more pivotal role in the process of renminbi internationalisation, but also lead to synergies with other offshore renminbi markets.

Hong Kong is now serving as the global hub for offshore renminbi business.  Of the 204 banks participating in our renminbi clearing platform, 181 are subsidiaries and branches of overseas banks or overseas presences of Mainland banks.  With the increasing use of renminbi in cross-border and offshore financial activities, there has been a phenomenal growth in transactions handled by the renminbi clearing platform in Hong Kong.  The average daily turnover has expanded significantly from RMB5 billion in 2010 to RMB260 billion most recently, and of these, 10% were cross-border transactions with Mainland while the remaining 90% were offshore transactions.  This indicates that more and more offshore renminbi financial activities are being supported by Hong Kong’s platform.

Meanwhile, the number of renminbi correspondent banking accounts opened by overseas banks with banks in Hong Kong grew from 187 at the end of 2010 to 968 at the end of 2011 and 1,402 at the end of 2012.  The amounts due to and due from these overseas banks ranged from RMB100 billion to RMB120 billion in each direction.  On a net basis, it was an amount due from overseas banks, suggesting the provision of renminbi funds by Hong Kong banks to these overseas banks.  Besides, statistics from SWIFT show that the value of renminbi settlement handled by banks in Hong Kong accounts for 80% of the total payments that are conducted with the Mainland and among the offshore market globally.

Leveraging on our strengths and capturing further opportunities

In conclusion, the Hong Kong offshore renminbi market and the related financial infrastructure have made substantial advancement.  Looking ahead, further growth of Hong Kong’s offshore renminbi market will, to a large extent, depend on the efficacy of corporates and financial institutions in grasping the business opportunities afforded by the vastly expanded policy headroom.  In particular, we have to avail ourselves of the growing use of renminbi in international transactions by expanding Hong Kong’s renminbi business links with other places, with a view to enhancing our role and function as the global hub for offshore renminbi business.

On policy front, I look forward to further widening of the bridges for the circulation of renminbi funds between the onshore and offshore markets.  This includes further streamlining of relevant policy arrangements so that cross-border transactions that are currently settled in the US dollar could also be done in renminbi, and followed by continued relaxation of cross-border flows of renminbi in both directions in tandem with the liberalisation of Mainland’s capital account.  This will not only help promote the development of Hong Kong as the offshore renminbi business centre, but also enable Hong Kong to play a significant role in the reform and opening of the financial system on the Mainland.

Key statistics of offshore RMB business in Hong Kong

Figures at period-end unless otherwise stated.

Norman T. L. Chan
Chief Executive
Hong Kong Monetary Authority
21 February 2013