HKEx mulls liquidity support for RMB equity trading

Hong Kong Exchanges and Clearing, the operator of the Hong Kong stock exchange, is exploring whether to provide renminbi on a limited basis to Hong Kong dollar investors to facilitate trading in forthcoming RMB equity products, its head of market development, Romnesh Lamba, told a conference yesterday.

Addressing an audience at Bank of America-Merrill Lynch’s RMB Internationalisation Day at the JW Marriot Hotel in Hong Kong, Lamba pointed out that any move by the HKEx to offer RMB liquidity support is targeted at "aftermarket trading on an ongoing basis”.

“For the initial round of IPOs, RMB liquidity may have to come from the brokers and underwriters, who need to work with banks to line up liquidity for institutional and retail investors.”

Market participants are readying for RMB equity products to be rolled out on the exchange, with the regulatory framework already in place to support listing and trading, market infrastructure largely ready and intermediaries completing preparations.

But Lamba admits that the big challenge remains the limited level of RMB liquidity and hence the exchange's efforts to provide some form of liquidity pool.

At this stage, HKEx is not necessarily looking to promote RMB equities with "some stated goal” but rather sees it as a strategically important product that will, over time, become an instrument for Hong Kong and international investors to diversify their RMB assets and will also appeal to Chinese investors, including QDII funds.

Presently, the development of RMB products still revolves around the perception of RMB as an appreciation play, meaning investors are willing to accept the low yields offered by bank deposits and RMB bonds.

But at some point investors aiming for a higher yield or product diversification will want to move into RMB equities. “After the first phase of currency diversification, people may move onto investment or product diversification within that currency,” Lamba notes.

In the long term, RMB equities are seen as a critical product for HKEx “when Shanghai and Hong Kong become fungible and some shares can be traded on both markets in the same currency”.

Lamba says the HKEx’s plan for deepening the RMB asset pool is to launch equity and NDF products initially, and derivatives at a later stage.

Regarding HKEx’s lobbing efforts for policy change to develop the offshore RMB market, Lamba says the dialogue, which historically has been with the China Securities Regulatory Commission, has now been extended to the People’s Bank of China, which is the primary driving force for RMB internationalisation initiatives. It is also talking with mainland exchanges and index providers.

The dialogue is broad and goes beyond listing matters to more general issues such as capital flows and product development. It also touches on HKEx’s views on the remittance of proceeds to China from the issuance of offshore RMB bonds, Lamba adds.

“If it is true redenomination of foreign direct investment, that should be good for China, so [the regulators] should make it easier for proceeds to go back rather than view it on a case-by-case basis,” he notes.