The development of renminbi business in Hong Kong will help prepare Hong Kong for the inevitable process of the renminbi becoming an international currency.
With rapid modernisation, the Mainland economy has now become one of the largest in the world. It was the fourth largest in terms of GDP in 2005. By other measures, for example the amount of foreign reserves and the size of population, it already ranks first. With the economy currently growing at around 10% a year in real terms, which is much faster than many developed economies, and with the renminbi appreciating against most currencies, the Mainland is likely to move quickly up the rankings in the coming years.
As the currency of one of the largest economies of the world, the renminbi, like the currencies of other major economies, will become an international currency, and the declared policy of gradually introducing convertibility for capital account items of the balance of payments will help achieve this status. This process will be gradual, subject to the pace of liberalisation of the capital account. But we have been seeing interesting progress, in part resulting from genuine economic needs and in part from a deliberate policy of accommodating the use of renminbi outside the Mainland. The use of renminbi by Mainland residents for consumer spending outside the Mainland, particularly in Hong Kong and Macau, and in foreign cities along the border of the Mainland, has been increasing. In these foreign cities the renminbi has been used for the settlement of so-called "border trade", effectively making the renminbi a hard currency in those places. Very soon, liberalisation of convertibility permitting, the renminbi will become one of the major currencies in the region, as intra-regional trade, particularly involving the Mainland as a trading partner, is growing rapidly. There is a possibility that in the fullness of time, when the Mainland develops into one of the major economic powerhouses of the world, the renminbi may even become a reserve currency, just like the US dollar, the euro and to a lesser extent the yen are now, and an anchor currency for the region.
I believe that this process is an inevitable one. As an international financial centre, Hong Kong must develop its capability to handle financial transactions denominated in the renminbi, which will increase. This is why we have been pushing hard for the development of renminbi business in Hong Kong and the associated inclusion of the renminbi in our sophisticated, multi-currency financial infrastructure.
I first raised the subject of renminbi business in Hong Kong with Mainland officials in 2001, when leading the Hong Kong Association of Banks delegation's annual visit to Beijing, and the immediate consideration for both sides was to establish a proper channel to return renminbi circulating outside the Mainland back to the banking system on the Mainland. Since then, and after the introduction of limited renminbi banking business in two stages in 2004 and 2005, the prospect of the renminbi developing into an international currency has become even clearer. The desirability of Hong Kong serving as the testing ground for the renminbi to get onto the world stage has also become clearer, as has the need for Hong Kong to develop its financial infrastructure to cope with the increasing volume of international financial transactions denominated in the renminbi that will inevitably come. These developments are not only consistent with, but also essential to, the maintenance of the status of Hong Kong as an international financial centre - a requirement laid down in Article 109 of the Basic Law, which is also a stated policy in China's eleventh five-year plan.
As a rather impatient person, who always wants everything done by yesterday, I would have liked to have seen faster progress. But we all have to be cautious about the implications of too rapid financial liberalisation for monetary and financial stability on the Mainland, particularly in the increasingly complex global financial environment. The priority is to get it right, which is important not just to China but also the rest of the world. The latest development relating to the possible use of the renminbi to pay for retained imports from the Mainland for consumption in Hong Kong and the issue of renminbi bonds in Hong Kong is most welcome. We will, as always, work out the details with the People's Bank of China and other Mainland authorities, with the goal of introducing them as soon as possible.
Joseph Yam
13 July 2006
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