The city is prepared to roll out more financial products to absorb the offshore Chinese currency in the future, adding to the impending launch of the dual-currency trading counter model for stocks and the Swap Connect mechanism, Chan, Hong Kong's Financial Secretary, told the Caixin Summer Summit 2023 in Hong Kong on Friday.
"Even though the world economy has emerged out of the shadows of Covid-19, the global environment is still complicated," Chan said. "It is in such an era that Hong Kong can play a crucial role of a platform for China and collaborations with foreign countries.
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"We will continue to reform and optimise Hong Kong's financial market, deepen interactions with the mainland's financial markets and establish links between China and the world's capitals."
Chan says Hong Kong will turn more towards Asian markets, particularly Southeast Asian and Middle Eastern countries, for trade liberalisation and investment opportunities. Photo: Handout alt=Chan says Hong Kong will turn more towards Asian markets, particularly Southeast Asian and Middle Eastern countries, for trade liberalisation and investment opportunities. Photo: Handout>
China's ambition to challenge the US dollar's status as the world's major reserve currency that dominates global trade and commodity trades offers Hong Kong an unprecedented opportunity to recast its image as a financial centre after three years of isolation from the rest of the world during the Covid-19 pandemic. More than 30 countries including Brazil and Saudi Arabia have now agreed to use the yuan for trade settlements, creating huge demand for more investment channels in the offshore market.
Hong Kong is already the world's biggest market for the offshore yuan, processing about 75 per cent of settlements involving the currency globally. It had 1 trillion yuan (US$140 billion) in offshore yuan deposits as of the end of 2022, according to central bank data, versus 718.3 billion yuan in 2020.
"The main thing about the internationalisation of the yuan is that the US dollar keeps raising interest rates, while the yuan is cutting [rates]," Leung, CEO of Hong Kong's Securities and Futures Commission (SFC), said at the Caixin Summit. "For the first time in years, the yuan has lower financing costs than the US dollar.
"The other side of the coin is geopolitics, where countries are starting to experiment with local currencies and yuan payments in commodity trading."
The next product in store might be offshore futures on Chinese government bonds for hedging needs, Yue, CEO of the Hong Kong Monetary Authority, told the same conference. Meanwhile, Hui, Hong Kong's Secretary for Financial Services and the Treasury, told Shanghai's Lujiazui Forum that the yuan "is an inevitable choice" for asset allocations.
Secretary for Financial Services and the Treasury Christopher Hui at the Lujiazui Forum in Shanghai on Friday. Photo: Handout alt=Secretary for Financial Services and the Treasury Christopher Hui at the Lujiazui Forum in Shanghai on Friday. Photo: Handout>
"More regions including Asia are considering diversification in terms of asset allocation, when a wild swing or a spike in the US interest rate impacts the exchange rate," Hui said. "The yuan is an inevitable choice. With the yuan being part of multi-asset allocations, Hong Kong can do lots of jobs in many aspects."
Chan said the yuan currently has only a 3 per cent share of international cross-border payments and reserve currencies, a position that is not matched by China's size in foreign trade and the economy. The SFC's Leung said China's low interest rate environment might spur more companies to increasingly tap offshore markets by selling yuan bonds because of the Chinese currency's funding cost edge over the US dollar, offering a new window for internationalising the yuan.
Hong Kong is launching on June 19 the dual-currency stock trading counters, which will allow local and overseas investors to freely convert selected stocks between the yuan and the Hong Kong dollar. The scheme, which is designed to promote the use of the offshore yuan, has already approved 21 stocks, such as those of Chinese technology giants Alibaba Group Holding - this newspaper's parent firm - and Tencent Holdings, for trading.
Hong Kong and mainland Chinese regulators are also discussing giving onshore investors access to the dual-currency trading, a move that can save these investors exchange-rate costs and expand the pool of yuan to be deposited in the city, the SFC's Leung said.
The dual-currency trading counter model comes a month after the city introduced the Swap Connect, which allows foreign investors to participate in the mainland's interbank financial derivates market for the first time. Hong Kong also already has cross-border link programmes with the mainland covering stocks, bonds and wealth-management products.
Chan said Hong Kong will turn more towards Asian markets, particularly Southeast Asian and Middle Eastern countries, for trade liberalisation and investment opportunities, as their economies have shown more resilience than western countries, which are gripped by higher borrowing costs and recession threats. At the same time, bourse operator Hong Kong Exchanges and Clearing will further explore listing resources in these two regions, where many companies are interested in going public in Hong Kong, the SFC's Leung said.
"We hope to grow with other offshore yuan centres and grasp these opportunities together," the HKMA's Yuen told the Caixin summit.
"We hope that we can together make good use of the infrastructure of the Hong Kong market to promote innovation and growth in the cross-border and offshore business, and create a better yuan ecosystem to further promote the process of its internationalisation."
