After four months of rapid growth, preliminary figures suggest that the rate of increase in renminbi deposits moderated in May.
As I mentioned in my Viewpoint article on 24 April, among the factors contributing to the recent rapid growth of renminbi deposits taken by the banks participating in renminbi business in Hong Kong (Participating Banks), the most important is probably the strong market expectation of a continuing, significant appreciation in the exchange rate of the renminbi. In the free-market environment of Hong Kong, and given the substantial transaction needs of Hong Kong residents travelling to the Mainland, this expectation will inevitably generate considerable demand for converting Hong Kong dollars into renminbi, to the extent that this is allowed. As readers are aware, the Participating Banks provide a limited scope of renminbi services. According to the Settlement Agreement between the Participating Banks and the Clearing Bank under the scheme, conversion of Hong Kong dollars into renminbi is capped at RMB 20,000 a day for each Hong Kong resident. This daily limit, while allowing considerable scope for conversion into the renminbi, exerts a necessary restraining effect on the demand for the currency.
As readers may also have noticed, the rapid increase in demand for the renminbi in the first quarter of this year continued in April, with renminbi deposits in Hong Kong growing a further 33% by the end of the month to reach a level three times that of a year earlier. But we are still talking about small amounts in the context of the total renminbi deposit base or the total amount of foreign exchange being converted into renminbi on the Mainland. Some say that the free convertibility (subject to the daily limit) available to Hong Kong residents could be abused by international currency speculators taking positions on the renminbi. My response is that, even if that were really feasible, international currency speculators are not interested in such small amounts or in the tedious arrangements, involving thousands of Hong Kong residents, that would be necessary. Nevertheless, the matter has led to concerns on the Mainland, understandably in view of the continuing upward pressure on the exchange rate of the renminbi; the difficulties in monetary management arising from the continuing capital inflows; higher inflation necessitating stronger macro adjustment and control; and, possibly, the diminishing trade surplus and the associated slow-down in the growth of exports.
But we have noted that such trends have started to moderate. Early indications are that the increases in renminbi conversion and the amount of renminbi deposits have slowed considerably in May, along with the slower pace of renminbi appreciation in recent weeks. This may also be attributed to the higher handling fee levied by the China Foreign Exchange Trade System on the trading of renminbi by the Clearing Bank from 5 May, which in turn has widened the buy-sell spread in the Clearing Bank’s quotations for the Participating Banks , from 10 pips to 75 pips. As a result, the transaction costs borne by Hong Kong residents converting Hong Kong dollars into renminbi have increased accordingly. This is expected to act as a considerable restraint on Hong Kong residents buying renminbi from the Participating Banks.
Some have suggested that there might be a need for measures to restrain the growth of renminbi business in Hong Kong. I have some reservation. Given the increasing economic links between the residents in Hong Kong and on the Mainland, it is inevitable that the transaction demand will continue to grow. Further restrictions over transactions conducted under the renminbi business scheme could have the effect of siphoning the flow from this proper, transparent channel, which has been functioning for a few years now, back into obscure and unregulated channels. I hope this does not happen because individual residents might be exposed to additional risks that they might not be aware of or in a position to manage. We will be observing developments closely to ensure the healthy development of renminbi business in Hong Kong. We also need to address the concerns on the Mainland as best as we can.
I certainly hope that the intended developments concerning the continuing issue of renminbi bonds in Hong Kong and the use of the renminbi for settling purchases of imports from the Mainland into Hong Kong will not be affected. Increasing the capacity of the financial systems of Hong Kong to handle economic and financial transactions denominated in the renminbi, which is what we are trying to achieve, will be of great benefit to the country. Our sophisticated financial infrastructure and efficient financial intermediation can help serve the many needs for financial services on the Mainland.
Joseph Yam
5 June 2008
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