How To Spur The Growth Of Hong Kong’s Offshore RMB Market?

The author is ANZ greater China chief economist Liu Li-Gang

Hong Kong is the most active offshore RMB market in the world. At the end of March, the RMB deposits grew to RMB945 billion from merely RMB104 billion in July 2010. RMB deposits now represent 12.6% of banks’ deposits in Hong Kong.

Trade-related cross-border remittance averaged RMB375 billion over the last 12 months, around 70% of Hong Kong’s total trade.

Outstanding RMB loan reached RMB425 billion at the end of 2013, comprising RMB310 billion of RMB bond issuance and RMB115.6 billion of RMB lending by banks.

While Hong Kong has played a major role in contributing to China’s initiative to promote the international use of its own currency, the offshore RMB market is also a key and unique growth driver of Hong Kong’s financial industry.

According to the latest Triennial Central Bank Survey April 2013 by the Bank for International Settlements (BIS), the role of the U.S. dollar as the world’s dominant currency remains unchallenged.

Foreign exchange deals with the U.S. dollar pairs represented 87% of the total Forex transaction in the world.

However, within just four years of rapid development, the volume of forex transactions for the RMB has climbed to around 2.1% of the world’s total.

Trading between U.S. dollar and RMB rose by 3.6 times and accounted for 17.7% of total average daily turnover in Hong Kong, up from 4.5% in 2010, surpassing Hong Kong dollar against U.S. dollar as the most heavily traded currency pair in the local market.

Despite the impressive growth, we still consider the current stage of Hong Kong’s RMB market embryonic in terms of the breadth and depth of the market.

Trade settlements in RMB are still highly concentrated in the cross-border exports and imports between the Mainland and Hong Kong.

Contrary to the U.S. dollar that is heavily used in invoicing and settling global trades, RMB is still rarely used for trade settlements between Hong Kong and the 3rd country, or even between China and an economy other than Hong Kong.

In the banking sector, there has been an imbalance between the two sides of their RMB balance sheet. The ratio between RMB deposits and lending is about 7:1. This reflects that banks in Hong Kong still have difficulty in utilizing their RMB deposits.

There has been a hope to accelerate the development and usage of offshore RMB derivative products in the money market. However, apart from cross currency swap, the usage of offshore RMB interest rate swaps in fixed-float hedging remains relatively limited even after the establishment of a CNH HIBOR fixing in June 2013.

The penetration of RMB in the capital markets is also one-sided. While the so-called Dim Sum bonds have gained traction, listing activities of RMB stocks or other securities in Hong Kong’s stock market remains scant.

Even for the Dim Sum market, few issuance by onshore enterprises to fulfill their genuine needs in China are not up to speed.

In addition, the tenors issued are so concentrated on the short-end of the yield curve with the majority lasting 3 years or below.

Compared with London’s Eurodollar market, Hong Kong’s offshore RMB market seems to be less diversified. According to the BIS survey, the Eurodollar market is responsible for 41% of the global forex deals for the U.S. dollar. The U.S. dollar forex transaction represented 88% of all over-the-counter forex transactions in London.

In Hong Kong, forex transactions in RMB represent only 18% of the forex market. The RMB usage is highly concentrated on U.S. dollar or Hong Kong dollar.

So how can Hong Kong’s offshore RMB market flourish?

We think the Chinese government should encourage China’s state-owned enterprises to receive and pay RMB. A substantial proportion of RMB trade settlements in Hong Kong are primarily conducted by exporters and importers with affiliated business entities in the Mainland on a cross-border basis.

The government should also remove the cap on daily conversion and remittance amounts, and allow Hong Kong’s banks to lend RMB to individuals.

Singapore, for example, does not have a restriction of daily conversion limit for the RMB, while the RMB20,000 cap has not had any revision in Hong Kong since the commencement of individual RMB business in 2004.

In addition, personal borrowing and credit in RMB is not allowed. This has restricted the growth of RMB assets in the balance sheets of Hong Kong’s banks.

And, the market should try to establish a meaningful yield curve in both short-end and long-end. It can also price a global commodity and index in RMB, and establish a RMB sovereign wealth fund in Hong Kong.