Hong Kong has been playing a unique and irreplaceable role in the process of renminbi internationalisation over the years, thanks to the strong support of the Central People’s Government, the active involvement of market participants, and our highly competitive offshore renminbi ecosystem. The National 14th Five-Year Plan reaffirmed the positioning of Hong Kong as an international financial centre, and its role as a global offshore renminbi business hub. As we celebrate the 25th Anniversary of the establishment of the HKSAR, it is an opportune time to review our journey of development as an offshore renminbi hub, and share some latest and important initiatives that will further reinforce Hong Kong’s leading role in offshore renminbi business.
Our journey
Since the launch of personal renminbi banking business in 2004, Hong Kong has been a trusted testing ground for many of the Mainland’s financial opening-up initiatives that included –
- the first dim sum bond issuance in 2007;
- the first cross-border trade settlement in renminbi in 2009;
- further expansion into the capital markets space with the Renminbi Qualified Foreign Institutional Investor (RQFII) Scheme in 2011; and
- an ever-growing suite of mutual market access schemes including Stock Connect in 2014, Northbound Bond Connect in 2017, and Southbound Bond Connect and Wealth Management Connect in 2021.
Alongside these initiatives, Hong Kong’s offshore renminbi business has experienced remarkable growth. This is evidenced by the largest offshore renminbi liquidity pool; leading position for renminbi payments and FX trading; active renminbi capital raising activities; and unparalleled access to the Mainland financial markets through cross-boundary connectivity programmes. These developments in turn contributed to the progress of renminbi internationalisation with significant milestones including, amongst others, inclusion of renminbi assets in major global indices; increased weighting of the renminbi in the International Monetary Fund’s Special Drawing Rights basket; and the recent establishment of a Renminbi Liquidity Arrangement by the Bank for International Settlements and the People’s Bank of China (PBoC) to provide liquidity to central banks.
Notwithstanding these achievements, there is still ample room for the renminbi to expand its international footprint to meet the increasing demand for the currency by corporates, households, reserve managers and institutional investors. In this connection, it is important to develop conducive and efficient renminbi capital markets to facilitate investment, risk management and asset allocation. The development of the renminbi as an investment currency will in turn incentivise market usage of the renminbi as a means for payment and settlement for cross-border trade and direct investment transactions, thereby facilitating the wider use of renminbi in real economic activities. To this end, we have developed a three-pronged approach to promote the continued development of the offshore renminbi market in Hong Kong: (i) enhancing offshore renminbi liquidity; (ii) facilitating the development of more diverse offshore renminbi products; and (iii) enhancing our financial infrastructure. I highlight the most recent initiatives in these three areas below.
Latest important initiatives
Enhancing liquidity -- currency swap agreement and Renminbi Liquidity Facility
The PBoC and the HKMA announced today enhancements to the existing currency swap agreement. As a long-standing currency swap agreement from now on, its size has been expanded to RMB800 billion / HKD940 billion from RMB500 billion / HKD590 billion, differentiating Hong Kong from other jurisdictions in terms of being the only one whose agreement is not subject to renewal, and also having the largest swap size.
This is another testament of the Central People’s Government’s resolute support to Hong Kong’s development as a leading offshore renminbi hub. On the back of the aforesaid arrangement, the HKMA will enhance its Renminbi Liquidity Facility, which will further support market liquidity, to facilitate market players to capitalise on renminbi opportunities including enhancements and innovations of offshore renminbi products and services. This is particularly crucial noting the positive trend exhibiting an increasing volume of renminbi payments being processed through Hong Kong. Our full-fledged renminbi payment system, which serves banks in Hong Kong and overseas, has continued to support global renminbi businesses with daily turnover now exceeding RMB1.5 trillion.
The key enhancements of our Renminbi Liquidity Facility are as below. Operational details and the effective date(s) will be announced separately.
- Expanding both the intraday and overnight repos from RMB10 billion to RMB20 billion each. As a result, an additional RMB20 billion in liquidity will be readily available to the market.
- Improving operational flexibility of the overnight repo, with its operating hours extended from previously 6:00 p.m. to 5:00 a.m. the next day until the renminbi Real Time Gross Settlement (renminbi RTGS) system closes; and Authorized Institutions participating in renminbi business (Participating AIs) can input overnight repo transactions via a streamlined process through their Central Moneymarkets Unit (CMU) Member Terminals.
- Reducing the repo rates of the overnight repo, with the spread over CNH HIBOR lowered from 50 basis points to 25 basis points.
The enhancements will facilitate the Participating AIs to provide services to their clients and other offshore centres in different time zones. More importantly, the increased depth of the offshore renminbi liquidity pool will enhance market efficiency and underpin the growth of cross-border trade, investment and financing, and other economic activities, thereby strengthening Hong Kong’s development as a leading offshore renminbi hub and its unique role in the internationalisation of the renminbi.
More renminbi products -- Swap Connect
Apart from liquidity, it is also essential to develop a more diverse range of renminbi-denominated products in Hong Kong. The continuous enhancement of our mutual market access schemes with the Mainland will help on this front.
Earlier today, we celebrated the 5th Anniversary of Bond Connect with a new initiative for mutual access between interest rate swap markets in Hong Kong and the Mainland, known as “Swap Connect”. As Mainland bonds play an increasingly strategic and long-term role in global investors’ portfolios, the need to manage related interest rate risk, exchange rate risk and liquidity risk for their bond investment will be more prominent. The introduction of Swap Connect is timely to address international investors’ risk management needs and complementary to Bond Connect. Leveraging the innovative design of Bond Connect, Swap Connect allows global investors to trade interest rate swaps in the Mainland (under Northbound Trading to be launched first in the initial stage) in a convenient and secure manner via an infrastructure connection in the two places, while following existing trading practices and operational setup in Hong Kong.
We will continue to explore the provision of more diversified risk management tools to drive further allocation into Mainland bonds and the deeper opening-up of the Mainland bond market, while facilitating the development of Hong Kong as a risk management centre.
Enhancing infrastructure -- developing the CMU into a major international central securities depository (ICSD)
The third important area is to further enhance our financial market infrastructure to facilitate advancement of the offshore renminbi market in Hong Kong. At the core of this effort is the HKMA’s three-year enhancement programme plan to modernise the CMU into a major ICSD in Asia, so as to better support the connectivity between Mainland and international financial markets in respect of cross-border clearing, settlement and custodian operations (see Developing the CMU to reinforce Hong Kong’s status as an IFC). In fact, a sound and robust financial infrastructure is indispensable to the stability and integrity of our monetary and financial systems as well as Hong Kong’s status as an international financial centre.
The enhancement of CMU’s service capabilities will enable investors from the Mainland and abroad to settle debt securities more efficiently, in turn lowering cross-border settlement costs. It will also allow us to proactively seize market opportunities and to attract Mainland and international issuers to issue bonds in Hong Kong, thereby promoting the vibrant development of Hong Kong’s bond market and reinforcing the growth of our dim sum bond market in depth and diversity.
Looking ahead
Building on the stellar achievements, we will continue to work closely with our Mainland counterparts and market participants to create more policy headroom and an enabling environment that will boost Hong Kong’s offshore renminbi hub, as an important underpinning of our status as an international financial centre.
Eddie Yue
Chief Executive
Hong Kong Monetary Authority
4 July 2022
