Hong Kong may have pegged its currency to the US dollar, but the renminbi is flavour of the year as the territory pushes for stocks, bonds and other financial products denominated in the mainland currency.
Financial groups are rushing to take advantage of key reforms introduced by China in July, which liberalised the flow of renminbi in Hong Kong and paved the way for a burst of financial innovation.
“This is a huge opportunity for Hong Kong,” says John Greenwood, Invesco chief economist and architect of the exchange rate mechanism that governs the Hong Kong dollar, the territory’s main currency.
The liberalisation of the renminbi in Hong Kong is part of China’s plan to transform it from a domestic currency into a global one. Since July, any company in the world has been free to open a renminbi bank account in Hong Kong while groups in the city are now able to transfer funds among themselves and create new renminbi-denominated investment products.
Joseph Yam, former chief executive of the Hong Kong Monetary Authority, says Hong Kong is “the ideal laboratory” within which Beijing can experiment as it internationalises its currency. Foreign companies, the thinking goes, will be more willing to use the renminbi in cross-border trade deals if they are able to invest or hedge the Chinese currency in the sophisticated financial system of the former British colony.
The pace of change has been dramatic. Banks, fund managers, and insurance companies have launched a wide array of products denominated in the renminbi, seeking to capitalise on fervent investor demand for exposure to the Chinese currency. In the foreign exchange markets, renminbi-dollar trading volumes have surged to more than $200m per day. Forwards, swaps and options are also starting to trade but at low volumes. “This market is going to grow in an exponential way,” says Jens Scharff-Hansen, co-head of foreign exchange trading for Asia at Deutsche Bank.
But the biggest splash came in the bond market in August when McDonald’s, the US burger chain, became the first multinational company to sell renminbi bonds in Hong Kong, raising Rmb200m ($29m).
Financiers hope the city will eventually become an important fundraising centre for groups that have operations in China. However most observers reckon this will happen only if Beijing scales back the strict controls on flows of capital from Hong Kong to the mainland. At present, approvals to move the renminbi in or out of the mainland for investment purposes remain subject to approval of Beijing on a case-by-case basis.
Even so, banks such as Standard Chartered – which arranged the McDonald’s bond – are beefing up their teams in expectation that the market will continue to grow apace.
Hong Kong Exchanges and Clearing, operator of the city’s stock exchange, is also moving to get in on the action, and hopes to offer shares denominated in renminbi by next year.
Yet the growth of the renminbi capital markets in Hong Kong will depend on the speed and extent to which the Chinese currency flows out of the mainland and into the pockets of foreign investors. On this count, the city’s dealmakers have grounds for optimism.
The pool of renminbi deposits in Hong Kong’s banking system has been expanding exponentially in recent months, reaching Rmb149bn in September, more than twice the level at the start of the year.
And while the renminbi still constitutes less than 3 per cent of total deposits in Hong Kong, bankers expect that proportion to rise rapidly in the coming years as China allows more of its currency to flow out of the mainland.
“It doesn’t take much deposit migration from the mainland to Hong Kong to have a phenomenal effect,” says Robert Minikin, a foreign exchange strategist at Standard Chartered.
As well as through trade, the renminbi flows into Hong Kong from residents who are allowed to buy as much as Rmb20,000 per day with foreign currencies. These flows are expected to continue apace given the widespread expectations that the renminbi will appreciate sharply against the US dollar. A new source of renminbi to the Hong Kong market is the HKMA, the city’s de facto central bank, which last month drew down Rmb10bn of its Rmb200bn currency swap facility with the People’s Bank of China.
But the reason the HKMA exercised the swap in the first place was that Bank of China (Hong Kong), the city’s designated clearing bank for renminbi trade settlement, had reached the limit of its 2010 quota for renminbi conversion. The news took the market by surprise, since Beijing had never announced that the supply of renminbi for trade settlement was subject to a quota.
Whatever the hopes of Hong Kong’s financial community, there are likely to be even more hidden bottlenecks when it comes to the growth of offshore renminbi financial markets. Beijing will not allow things to go too far too fast.