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Following is the speech by the Financial Secretary, Mr John C Tsang, on "Hong Kong's Role in the Internationalisation of Renminbi" at Chatham House today (October 5, London time):
Mr Davies, Distinguished Guests, Ladies and Gentlemen,
Good morning.
It is a great pleasure for me to be back in St James Square.
First of all, let me congratulate Chatham House on its 90th Anniversary. Since 1920, this august institution has been promoting free speech and independent thinking, qualities that we admire and advocate in Hong Kong.
The last time I had the pleasure of speaking to a Chatham House audience was in Hong Kong in March last year, at a Workshop co-organised by Chatham House and our Central Policy Unit. It was during a particularly low point for our economy in the face of the global financial crisis. Our exports contracted by a phenomenal 22.7% and our GDP a massive 7.7 per cent year-on-year in the first quarter of 2009. I recall speaking about the shock of recession as well as our confidence even back then in preparing for economic recovery.
I'm pleased to tell you that our confidence has proved to be well founded. We have been able to achieve the correct mix of measures to stabilise the financial sector, assist our SMEs, protect jobs and help the needy. Our economy is now doing well again. We expect robust economic growth this year of between 5 and 6 per cent, and our latest unemployment figure has dropped to 4.2%.
Overall, the big picture is looking fairly rosy in our part of the world. One of the key questions for Hong Kong, however, is this. What are our prospects for the coming decade?
No doubt, China's economic rise presents huge opportunities as well as challenges for our city. In fact, our Secretary for Financial Services and the Treasury addressed this topic when he visited Chatham House in June this year. Professor K C Chan spoke about Hong Kong's future prospects as the gateway to the Mainland of China in a rapidly changing world.
And, even in the short time since June, there have been significant changes in Hong Kong's prospects as the gateway to China, and in particular, as the financial gateway to the Chinese Mainland.
Today, I shall talk about something that is of huge interest to the business community all around the world, namely Hong Kong's role in the internationalisation of the Renminbi.
This is an area that will be of immense importance to Hong Kong in the coming decade. It is an area which will have huge implications for local and overseas investors, and an area that is making news headlines regularly around the globe.
First though, allow me to take you back in time, to the 1950s and 60s. Back then, London was playing a leading role in the emerging Eurodollar market. For the first time, US Dollars were being widely transacted outside America. London's position as an offshore centre for US Dollar business helped to cement the city as a global financial power.
Fast-forward to today, and Hong Kong is playing an increasingly important role as an offshore centre for Renminbi business.
I should highlight at this point that not all offshore financial centres are created in the same way. Indeed, there are significant differences between the expansion of the Eurodollar market in the mid 20th century and today's gradual liberalisation of the Renminbi.
For one thing, in the 1950s, geopolitical issues were behind a strong demand for US Dollars overseas. Also, the Eurodollar market was much larger then than the overseas Renminbi market is today.
At the same time, there are also some significant similarities.
First, London's role in the 1950s was based on providing an offshore centre for US Dollar business, similar to the development of Renminbi business in Hong Kong today.
Second, in both cases, currency convertibility is crucial. The British Pound became fully convertible in 1946.
In the Renminbi case, most economists agree that the currency is unlikely to become fully convertible any time soon, due to the Mainland's political system, its closed capital account and tight monetary controls. Hong Kong's advantage is that it already has a freely convertible currency as well as an established Renminbi business and banking infrastructure.
Also, if the development of the City of London half a century ago is any indication, we can expect current Renminbi developments to produce new opportunities, new financial products and new jobs, reaffirming Hong Kong's position as a global financial centre, alongside London and New York.
New York University economist Nouriel Roubini took a longer-term view when he wrote about the prospects of the Renminbi replacing the US Dollar as a future reserve currency.
In an Op-Ed in the New York Times in May last year titled "The Almighty Renminbi", Mr Roubini said, and I quote: "China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the Renminbi to become a reserve currency, but it could happen. China's currency swaps and Renminbi bonds in Hong Kong are steps along the path." End quote.
As well as currency swaps and Renminbi bonds, more steps along this path have been taken since Mr Roubini published his opinion piece.
There have, indeed, been exciting and wide-ranging developments, in recent months. And here's an example of how quickly things are moving.
In Hong Kong on August 19 this year, US fast food company, McDonalds Corporation, became the first non-financial foreign company to issue Renminbi corporate bonds. A year ago, few people could have imagined, not to mention predicted such a development.
McDonalds' corporate bond issue followed, what one commentator humorously described as, and I quote: "a McFlurry of activity".
It was only in July last year, that Beijing began testing the water for currency liberalisation by introducing a Renminbi trade settlement scheme.
The scheme started with Hong Kong, Macao and 10 ASEAN economies being able to settle trade with five cities in the Mainland. After all, it is only natural that the world's largest exporting nation should prefer to settle trade in its own currency, rather than in other major currencies, such as US Dollars, Euros or Japanese Yen.
On June 22 this year, this scheme was dramatically expanded. The Central Government announced that businesses all around the world would be able to settle trade with the Mainland using Renminbi. At the same time, Mainland locations covered by the scheme were expanded from just five cities to 20 provinces and cities.
In the first half of this year, the People's Bank of China estimated cross-border trade settlement in Renminbi at some 70 billion RMB - about 20 times more than that for the second half of 2009.
Hong Kong's share was some RMB 53 billion, about three quarters of the total amount.
Although this represents a small drop in a very large ocean of total Mainland external trade that amounted to more than RMB15 trillion (RMB15.6 trillion) in 2009, it is inevitable that, with more investors targeting China's strong economic growth, there will be even greater demand for Renminbi.
Estimates suggest that Hong Kong's total Renminbi trade settlement will be almost RMB 100 billion this year.
Timing, as always, is crucial. Mainland China's ability to withstand the global financial crisis has boosted its international trade at a time when other economies in Europe and the US are still struggling to regain their feet. It is the ideal time to promote trade settlement in Renminbi.
Hong Kong was also the first place outside the Mainland to have an interbank market for Renminbi. In addition to this development, businesses anywhere in the world can now open an account in Hong Kong and freely exchange Renminbi.
I should mention that this activity is not dissimilar to initiatives in the 1960s when wide ranging dealings in the Dollar began to take off outside the US itself.
I would also like to underscore that Hong Kong has the full backing of the Central Government in developing offshore Renminbi business. This has been made clear on many occasions and was reaffirmed in July with the signing of a supplementary memorandum between the People's Bank of China and the Hong Kong Monetary Authority on enhanced cooperation on cross-border Renminbi business.
This revision of the Clearing Agreement between the People's Bank of China, the central bank and the Bank of China (Hong Kong) Ltd, the clearing bank of Renminbi business in Hong Kong, lifted restrictions on Renminbi deposit holders transferring cash to buy wealth management products.
Still more recently, in August, the Central Government allowed offshore banks and central banks to invest in the Mainland's interbank bond market.
All these activities are encouraging the creation of a greater range of financial products offered by authorised institutions and helping to expand the liquidity pool for non-residents.
A prolific growth area with strong investor interest has been Hong Kong's Renminbi bond market. So far, there have been a total of some 20 Renminbi bond issues in Hong Kong since July 2007 with a combined value of more than RMB 40 billion (4.6 billion Euros).
Also, last year, the Central Government issued its first sovereign bonds in Hong Kong worth RMB 6 billion. This was an important vote of confidence in our financial services sector, and we expect a program of sovereign bond issues will follow.
In July this year, Hopewell Highway Infrastructure Limited – which specialises in toll roads - became the first Hong Kong corporation to issue Renminbi bonds in Hong Kong. The RMB 1.38 billion issue of Corporate Bonds carry an interest rate of 2.98%. This was a "win-win" situation that was attractive to both investors buying the bonds as well as the company issuing the bonds.
At the launch of these Renminbi bonds, the Chief Executive of the Bank of China (Hong Kong), Mr He Guangbei said, and I quote: "(This) not only contributes a new class of debt securities to the local RMB bond market, but also initiates a new funding channel for local companies with Mainland investment". End quote. This statement summarises succintly the potential of this new instrument to the market.
Most of the Renminbi bond issues so far, including Hopewell's, have been well over-subscribed, indicating strong demand for these products.
As well as promoting a greater range of products, Hong Kong has the ability to handle overseas liquidity and avoid causing undue shocks to the Mainland's financial market.
In expanding Renminbi business, the Mainland authorities have had to weigh up the benefits of settling trade in Renminbi against the risks of relaxing its controls over the capital markets.
Developing Hong Kong as an offshore centre for Renminbi business provides a solution to the dilemma.
Hong Kong is an established global financial centre in the Asian time zone. In this field, we are consistently ranked third in the global hierarchy behind London and New York.
With about 70 of the world's largest 100 banks operating in our city, we have a great depth and breadth of local and overseas financial talent.
Despite being a relatively small city, Hong Kong's stock market is the seventh largest in the world and third largest in Asia by market capitalisation. More than a third of the companies listed in Hong Kong are Mainland enterprises.
Most important, Hong Kong has its own freely convertible currency that has been pegged to the US Dollar since 1983. We thrive on a free flow of information, ideas, capital and talent. Our regulatory regime is robust and transparent and our common law legal system is based on the English system and underpinned by an independent judiciary. We also have a simple and low tax system. These are truly attractive attributes during a period of uncertainty and volatility.
Hong Kong has a proven track record in managing liquidity shocks. During the global financial crisis, there were no systemic risks, there were no bank runs, no bank bailouts and none of our banks failed.
In other words, Hong Kong is a stable and reliable intermediary for the Central Government to maximise the benefits and minimise the risks of currency liberalisation. No other offshore centre has such close ties and deep understanding of the Mainland financial system which have been built up over many years.
At the same time, for overseas investors, we provide a resilient and familiar financial platform that is fully compliant with international standards.
Renminbi banking in Hong Kong began in 2004 and has been gathering pace since then. Today, close to 80 banks offer Renminbi banking services, including deposits, remittances, credit cards, checking accounts and trade settlement services.
In July this year, the same month that the Central Government expanded the Renminbi trade settlement scheme, Renminbi deposits rose more than 15 per cent (15.6%) compared with the previous month. Today, total Renminbi deposits in Hong Kong exceed RMB 130 billion Renminbi.
This reflects the expanding diversification of our Renminbi banking services in recent months.
Turning to risk management. This is a key concern in today's globalised financial environment.
Because the Renminbi is not a freely convertible currency, the HKMA requires our banks to adopt particularly prudent measures in managing the liquidity risk arising from Renminbi business.
All authorised institutions are required to maintain Renminbi cash-plus-settlement balances with the Clearing Bank, the Bank of China (HK), "at no less than 25 per cent of customer deposits".
Beyond the banking sector, accounting firms see huge opportunities from the internationalisation of the Renminbi. Our world-class legal services will also be crucial to Hong Kong's successful evolution as an offshore Renminbi centre. Also, insurance firms could benefit from issuing policies denominated in Renminbi.
Ladies and Gentlemen, although Hong Kong has many advantages as an offshore centre for Renminbi business, we do not have a monopoly on this initiative. But we do clearly have the first mover advantage.
There is a great deal of competition from other financial centres around the world for a slice of this potentially huge pie. But we in Hong Kong remain confident that with the financial infrastructure, both hard and soft, that we have built up over the years, and thankfully, with the great head start in the conduct of business with the Mainland, we will be able to give anyone a good run for their money.
In our own neck of the woods, the Central Government in Beijing has also made it clear that there is room for more than one international financial centre in our vast nation of 1.3 billion people.
Naturally, there will be a degree of healthy competition between cities. Indeed, competition between Hong Kong and Shanghai is a popular talking point among commentators. It is also an incentive for both places to continue evolving in the face of local, regional and global competition.
To serve the best interests of our nation, the Central Government maintains that the relationship between our nation’s financial centres should be more complementary than competitive.
While Shanghai concentrates on the on-shore aspects of the financial business, this gives Hong Kong a free rein to concentrate on our strengths, such as our global connectivity, our experience in tailoring products for offshore markets and promoting international best practices.
We will also facilitate the gradual opening of the Mainland's capital account.
First, with our international connections and expertise in management, Hong Kong will continue to provide a platform for the flow of investment both into and out of the Mainland.
Second, we will strengthen co-operation between Hong Kong and Mainland regulatory bodies.
The third area will be to enhance Hong Kong's role as a "window" and "bridge" for Mainland banks to tap the international market. They can use Hong Kong as a capital-raising and capital management centre for foreign currency.
And fourthly, Hong Kong will continue to develop its offshore Renminbi business, providing an effective testing ground and "fire wall" for the further internationalisation of the Renminbi.
As Hong Kong presses home its unique advantages, Shanghai, and other emerging Mainland financial centres have a competitive edge in their deep understanding of the domestic markets and experience of onshore business.
The trick will be to combine our strengths for the best interests of our nation. Together, Shanghai and Hong Kong will be that twin engine of growth for our nation. We hope to be in a position to present to the international community how we can jointly serve their business interests.
Ladies and Gentlemen, I have briefly covered the main aspects for currency liberalisation in general and the internationalisation of the Renminbi in particular.
Hong Kong's development as an offshore Renminbi business hub will be at the core of our city's evolution as a global financial centre in the coming decade.
Renminbi trade settlement has made a promising start - and I would emphasise that it is only a start. We will continue to promote demand for Renminbi, develop new products and increase circulation of the currency offshore.
To achieve the best result for our city and our nation, we will continue to make the most of our strengths as a global financial centre, our close ties with the Mainland and our hard-earned reputation as a stable and efficient place for business. The developments on the financial front will be one of the key driving forces propelling our overall economy forward in the coming decade.
Ladies and Gentlemen, thank you for this opportunity to speak in some detail on a topic of great importance to Hong Kong in the coming decade.
Once again, congratulations to Chatham House on your 90th Anniversary. I look forward to following your organisation's insightful research and commentary for many years to come.
Thank you very much.
Ends/Tuesday, October 5, 2010
Issued at HKT 17:50
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