Hong Kong Corners Offshore RMB Market

by Mary Swire, LawAndTax-News.com, Hong Kong

27 June 2011

Following a question in the Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, emphasized how the government has been promoting the development of offshore renminbi (RMB) business in Hong Kong.

He noted how, along with the introduction of more measures and the deepening of existing measures to expand the use of RMB in cross-border transactions, the offshore RMB business in Hong Kong has grown rapidly in the past year with support from the central government and related Chinese (Mainland) authorities.

RMB trade settlement conducted through banks in Hong Kong in the first four months of 2011 amounted to RMB445bn (USD68.7bn), as compared to some RMB369bn in 2010. In addition, in the first quarter of 2011, 86% of the Mainland's RMB trade settlement was conducted through banks in Hong Kong, showing that Hong Kong is the prime platform for RMB trade settlement.

Driven by RMB trade settlement, RMB deposits in Hong Kong have also increased significantly and RMB financing activities became more active. In 2010, RMB deposits increased from RMB60bn in January to RMB310bn in December, and further to RMB510bn as of end April this year.

Concurrently, Hong Kong has become the largest offshore RMB bond market. The total amount of RMB bond issuance in Hong Kong increased from RMB16bn in 2009 to nearly RMB36bn in 2010. In the first five months of 2011, the amount of RMB bond issuance has exceeded RMB28bn.

As of end April 2011, there were a total of 173 banks participating in Hong Kong's RMB clearing platform. Among these participating banks, 151 were branches and subsidiaries of foreign banks and overseas presences of Chinese banks. They represent, he said, a global payment network capable of handling RMB transactions, and providing RMB clearing services between the Mainland and different parts of the world, as well as among various offshore markets.

He added that the sustained development of offshore RMB business provides the market with a variety of RMB investment products, which also helps consolidate Hong Kong's advantage as an asset allocation platform and promote the development of the asset management business. As of end 2009, the aggregate assets of Hong Kong's fund management business amounted to HKD8.5 trillion (USD1.1 trillion), of which over 60% were from non-Hong Kong investors.

With regard to competition from other financial centres, as more overseas companies which have trade and investment relations with the Mainland will use RMB to conduct transactions, it will be a natural development that financial centres (such as Singapore) all over the world will develop offshore RMB business.

As Hong Kong is one of the major windows and platforms for the Mainland's external trade and investment, with close links with the Mainland in the flows of people, goods, capital and information, it has a first-mover advantage. However, the government will continue to enhance and optimise the existing RMB financial platform, so as to facilitate the launching of more RMB financial products in the Hong Kong market, and will also conduct more promotion to advance Hong Kong's role and status as an offshore RMB business centre serving global needs.

In that regard, Hong Kong’s Treasury Markets Association (TMA) has recently announced that the Spot USD/RMB(HK) Fixing would be formally launched on June 27, 2011. The fixing is calculated by averaging the middle quotes after excluding the highest two quotes and lowest two quotes from the rates provided by the contributing banks.

The Spot USD/RMB(HK) Fixing will serve as a daily benchmark for the market exchange rates of USD against RMB(HK), and is expected to provide a reference rate for the pricing of RMB products in the offshore market. A total of 15 banks active in the offshoreRMB market have been designated by the TMA to contribute the price quotes for the RMB calculation of the fixing.

"The availability of a representative fixing for the spot USD/RMB(HK) exchange rate will be conducive to further development of RMB products in Hong Kong, which will be an essential element for the further expansion of Hong Kong's RMB offshore businesses,” said Lawrence Lam, Chairman of the TMA's Market Practices Committee. “The TMA will continue to work closely with market participants to facilitate development of new products and services to meet demand in the Hong Kong treasury markets."

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