HKMA to industry: More dim sum, m’goi!

Peter Pang, deputy chief executive at the Hong Kong Monetary Authority, says the government is keen to see the investments industry do more to support the expansion of offshore renminbi investment products.

Speaking last week at an industry event, Pang says Hong Kong authorities are capitalising on the territory’s headstart in the offshore renminbi market, but more needs to be done to ensure Hong Kong’s primacy.

Facilitating the internationalisation of the RMB is critical to Hong Kong’s long-term success as an international financial centre, Pang says.

“I expect the international status of the RMB will catch up with that of China’s economic growth, and possibly become a reserve currency,” he says, noting that China now represents 28% of global economic growth but use of renminbi for trade remains negligible. “For Hong Kong this represents a quantum leap.”

Hong Kong has natural advantages, as a part of the sovereign People’s Republic of China. It remains the springboard both for foreign direct investment as well as Chinese outbound investment, and boasts the biggest reserve of offshore renminbi.

Hong Kong authorities hope to reinforce this advantageous start. They are using the model of London’s development of Eurodollar markets in the 1960s and 1970s. As a result of creating a hub for offshore dollar trading, London went on to become the world’s biggest currency trading centre (with 37% of global turnover today) and the second-biggest fund management centre (with 8% market share).

Naturally, Hong Kong’s ability to follow a similar path depends on factors beyond its control, such as the development of the renminbi as an international currency. But authorities are working closely with counterparts in Beijing to establish closer ties between the onshore and offshore RMB markets, in order to establish a virtuous cycle of development that will take advantage of the renminbi’s gradual expansion.

Pang notes that trade settlement, financing and wealth management are mutually reinforcing activities that Hong Kong needs to dominate. Already 80% of mainland trade that is settled in renminbi is done in Hong Kong (although RMB-settled trade accounts for only 8.6% of China’s total trade, a level far below the equivalents of yen settlement for Japan, euro settlement for Europe or US dollar settlement for America).

The territory boasts the largest nascent market for dim-sum bonds. And recently Beijing has relaxed rules on reinvesting those proceeds back into mainland China.

In terms of wealth management, there is a growing number of renminbi bond products, with Hong Kong-domiciled funds benefiting from easier access to the mainland interbank bond market.

Hong Kong now has Rmb609 billion of deposits. Since 2007, the territory has seen Rmb160 billion issued in CNH-denominated instruments and, though small, the industry is growing rapidly.

However, dim-sum products lack critical mass, and do not offer attractive yields or sufficient liquidity.

Pang acknowledges the need for improvement in these areas, noting how such factors enabled London to maintain its edge as a financial hub versus Frankfurt when, in the early 2000s, it seemed the creation of the eurozone would drive business onto the European continent.

It is de rigeur for a promoter of a product or idea to look at how small it is, and call that a growth opportunity. Pang sticks to the script, noting that China FDI is around $600 billion per annum, dwarfing the CNH bond market – and therefore offering plenty of growth for financing in RMB, to allow issuers to avoid currency mismatches.

Pang calls for intermediaries and fund managers to develop and market more offshore RMB products, preferably clearing these on a platform recently developed by Hong Kong Exchanges and Clearing. “We’ve seen the development of many new types of products in the past 18 months,” Pang says, including derivatives, Reits and gold contracts. “We need a lot more.”