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HK gets Xmas gift in currency

By Hong Liang (China Daily)
Updated: 2008-12-30 07:39

It seems the central government has given Hong Kong a big present on Christmas eve when it announced, in one sentence, that it will allow the use of renminbi for the settlement of trade with Hong Kong, Macao and the ASEAN countries.

This proposal, of course, can help mainland exporters to minimize their foreign exchange risks. But it is obvious that Hong Kong is in a stronger position than any other competing financial center in the region to benefit from it. This, indeed, could be the break that Hong Kong has been wishing for to establish itself as an offshore renminbi center.

Because of the close social and economic ties between Hong Kong and the mainland, there has already been a sizeable renminbi deposit in the Hong Kong banking system. But the scope of the renminbi business in Hong Kong is largely limited to that of deposit taking. All renminbi deposits taken in Hong Kong by participating banks must be deposited with the People's Bank of China, the central bank, through Bank of China Hong Kong, which acts as the renminbi clearing bank.

The demand for renminbi by Hong Kong people for traveling to the mainland or as storage of wealth is growing rapidly. But its availability is constrained by the Settlement Agreement between the participating banks and the clearing bank which caps the conversion of Hong Kong dollars into renminbi at 20,000 yuan a day for each Hong Kong resident.

In recent months, the central government has introduced some specific measures that can lead to the wider use of the renminbi in Hong Kong. Earlier this year, it proposed a scheme that would allow qualified mainland enterprises to issue renminbi-denominated bonds in Hong Kong. More recently, the central bank said that it was considering a proposal to allow selected Hong Kong companies to issue renminbi-denominated bonds.

Details of these measures have yet to be announced. But bankers and economists said that the potential benefits that these earlier proposals can bring to Hong Kong would pale in comparison to the latest announcement, considering the huge amount of two-way trade with the mainland.

Latest figures showed that Hong Kong's total trade with the mainland amounted to $154.37 billion in the first nine months of 2008, up 9 percent from a year before. Imports from the mainland rose 8.9 percent to $144.21 billion and exports increased 10.1 percent to $10.15 billion.

Two-way trade between Hong Kong and the mainland in 2007 was $197.25 billion in 2007, up 18.7 percent from 2006.

It is expected that many mainland exporters trading with Hong Kong and the ASEAN countries would prefer to settle in renminbi to minimize foreign exchange risks when they are allowed to do so. When that happens, there will conceivably be hundreds of billions of renminbi in payments that need to be cleared through banking systems outside the mainland jurisdiction.

Hong Kong has the well-established financial infrastructure to act as the clearing center of trade settlement in reminbi under the proposed change in the mainland currency regulations.

As noted by Hong Kong Monetary Authority's chief Joseph Yam, the promotion of renminbi banking business in Hong Kong is to facilitate the orderly transaction of cross-border economic activities. The rationale, he wrote, is no different from that behind the capability that Hong Kong has already built into the banking system for handling transactions in the major foreign currencies.

"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," he wrote. "Our sophisticated financial infrastructure and efficient financial intermediation can help serve the many needs for financial services on the mainland."

E-mail: jamesleung@chinadaily.com.cn