Renminbi Bonds To Reinforce Hong Kong's Banking Status

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

25 June 2007

The issue of renminbi-denominated bonds in Hong Kong, hopefully by the end of June, will maintain the city's status as an international finance centre and aid Mainland fiscal reform, Monetary Authority Chief Executive Joseph Yam says.

In his latest Viewpoint article published on the authority's website, Mr Yam said it will be a small market to start with and secondary-market activity may be slow at first.

But he said Hong Kong's financial system is now able to handle renminbi-denominated activities in two out of the three channels of financial intermediation - banking and debt. With the renminbi included alongside the Hong Kong dollar, the US dollar and the euro, among the currencies the city's financial infrastructure is able to handle, it will also be possible for the equity channel to follow suit; in other words, for share listing and trading to be denominated in renminbi, if there is demand.

Mr Yam said exchange controls on the Mainland will gradually be removed and this may come faster than expected. Noting that the relaxation of capital outflow requires great emphasis on controllability, gradualism and keeping the initiative, he said Hong Kong will be the best place for controlled experiments.

Last week, the HKMA issued guidance to banks on the impending issuance of renminbi (RMB) bonds. In summary, participating banks may conduct the following additional RMB business in Hong Kong as a result of the changes:

- to open RMB deposit accounts for RMB bond issuers and underwriters in Hong Kong. The scope of eligible retail RMB depositors is still confined to individuals holding Hong Kong Identity Cards and Designated Business Customers (DBC).

- to process the remittance of RMB funds associated with RMB bond issuance and interest/principal payments via the Clearing Bank.

- to provide one-way exchange service for RMB bond issuers to convert RMB to Hong Kong dollar for the payment of bond issuance and related expenses. The scope of exchange services available to individuals and DBC remains the same.

- to conduct certain types of Regulated Activities, such as Dealing in Securities, Advising on Securities and Advising on Corporate Finance, under the Securities and Futures Ordinance (SFO) to facilitate the issuance of RMB bonds and dealing in such bonds by customers. RMB deposit account holders as well as Participating Banks may invest in such bonds using their own RMB funds.

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