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Following is the speech by the Permanent Secretary for Financial Services and the Treasury (Financial Services), Miss Au King-chi, at the roadshow luncheon on "Hong Kong as a global offshore RMB business hub and the opportunities for Latin America" held in Rio de Janeiro yesterday (October 2, Rio de Janeiro time):
Mr (André) Brandão, distinguished guests, ladies and gentlemen,
Good afternoon. It's a great pleasure to be here with you today. Let me say, up front, that this is my first visit to Brazil. And I am still getting used to the size of everything here. After all, Brazil is the largest country in Latin America, the world's fifth largest country, in size and in population, and the world's seventh largest economy.
And Rio de Janeiro has been a shock - a marvellous one. Rio is certainly one of the world's most dynamic and beautiful cities. Indeed, the drive and enthusiasm of your city, and this country, reminds me of Hong Kong - only on a much larger scale. Like Rio, Hong Kong hugs the water - in our case, Victoria Harbour. We are also international tourism and cultural centres. Indeed, we share a bond, an Olympic one. In less than two years, Rio will host the Summer Olympic Games - the first Games to come to South America. At the 2008 Summer Olympics in Beijing, Hong Kong was honoured to host the Olympic Equestrian events. Because of that, we will be sending a Hong Kong, China team to compete in the 2016 Rio Olympics. And I can tell you that is something all of Hong Kong looks forward to.
So we are both global cities. And financial centres, too. Yes, money makes our respective worlds go round.
Allow me to show you what money means to Hong Kong. This is a 100 Renminbi (RMB) note, a currency used in Mainland China. The RMB is under capital account control. It is not fully convertible, though it aspires to be an international currency. This is a 100 Hong Kong dollar note, a currency used in Hong Kong as a Special Administrative Region and the global financial centre of China. The Hong Kong dollar is fully convertible, without any capital account control. I'm here today to tell you more about this currency story, and how the finance and business sectors of Brazil can cash in. It's a story told in three parts, and it features the RMB services provided by Hong Kong in trade settlement, capital market financing, and asset management for the international community.
Mainland China is Brazil's largest trading partner. In the past decade, Brazil's exports to Mainland China increased by nine times to US$46 billion in 2013, accounting for 19 per cent of its total exports. Its imports from Mainland China increased by 16 times to over US$37 billion, accounting for 16 per cent of its total imports. In the future, you are likely to be seeing more and more of the Chinese RMB, and it is expected that the use of RMB will open up more business opportunities for companies in both countries.
The relationship between Mainland China and Hong Kong is summed up by "One Country, Two Systems". Under "One Country", Hong Kong is part of China and close to its fast-changing financial landscape and capital market reforms. Compared with other international financial centres, Hong Kong is better placed to facilitate the cross-border use of RMB by providing a "firewall" against external market shocks, as well as a "testing ground" for pilot financial reforms. Our financial co-operation with Mainland China is based on two key principles: first, bringing mutual benefits to both places, and second, ensuring national financial security. At the same time, under "Two Systems", Hong Kong has its own financial, legal and independent judicial systems. Hong Kong's strengths don't end there. We enjoy a free flow of information and capital, our financial markets are sophisticated, and we are blessed with a rich talent pool and robust market infrastructure. Taken together, these advantages are central to Hong Kong's role as a testing ground for the internationalisation of RMB. More importantly, we possess the international DNA which makes us stand out from other financial centres inside Mainland China. We speak the international financial language and appreciate the international market values. We stand ready to anchor global players and bridge Mainland China with the rest of the world.
As you know, Mainland China's economic reforms and opening-up policy began to take shape in the late 1970s. It is the national policy to deepen such reforms, including further opening up of Mainland China's capital markets, and moving more quickly towards the full convertibility of RMB. Financial reforms have picked up speed especially after the global financial crisis, as Mainland China seeks a larger share of voice in shaping the international agenda commensurate with its economic growth.
Economic growth, in Mainland China and throughout Asia, has been attracting investment funds from around the world. At the same time, as more and more wealth is created in Asia, people are looking for investment options beyond the region. Hong Kong, one of the world's leading financial centres, is the place to take advantage of these developments. We offer an international platform to bridge international liquidity with Mainland Chinese proxy products, as well as Mainland Chinese liquidity with international products.
Hong Kong boasts the world's sixth largest stock market, and ranks the third in raising equity funds through IPOs. We are the eighth largest banking centre. Seventy of the world's 100 top banks operate in Hong Kong, while 14 of the top 20 global insurers conduct their business in the city. Overseas investors account for 46 per cent of trading on our Stock Exchange. Of the HK$16 trillion assets under management in Hong Kong, more than 70 per cent are funded by overseas investors. Indeed, following global practices and maintaining market quality are keys to sustain our international DNA and enhance our attractiveness to market participants from around the world.
The offshore RMB business in Hong Kong started in 2004. It is perhaps the most vivid illustration of financial co-operation between Mainland China and Hong Kong under "One Country, Two Systems". Over the past 10 years, it showcases Hong Kong's unique position as a super-connector between Mainland China and the rest of the world. With full support from the Chinese Central Government, we started to offer RMB banking business for personal accounts in 2004, cross-border RMB trade settlement in 2009, cross-border RMB direct investment and further to RMB portfolio investments in 2011 with the launch of the Renminbi Qualified Foreign Institutional Investors (RQFII) scheme. Through cross-border trade, direct investments and portfolio investments, Hong Kong is linking up the offshore and onshore RMB markets, and promoting the healthy circulation of RMB funds.
The increasing use of RMB in international trade and finance will not only facilitate the trade and investment between Mainland China and the rest of the world, but also offer new opportunities for corporations and financial institutions, here in Brazil, and around the world. Good progress has been made for the trilogy of RMB internationalisation: first, as a trade settlement currency, that is to establish RMB as a currency for international trade settlement; second, as an investment currency, that is to promote RMB as an internationally accepted currency for investment; and third, as an international reserve currency, that is to turn RMB eventually into a reserve currency. Allow me to update you on these areas and how they can bring you business opportunities.
First, RMB as a trade settlement currency. The RMB trade settlement pilot scheme was launched in 2009. Today, all trade between Mainland China and the rest of the world can be settled in RMB. Some 20 per cent of Mainland China's external trade transactions are settled in RMB. That's up from just two per cent in 2010. At present, 90 per cent of these trade settlement activities are handled by banks in Hong Kong. We hold the lion's share of RMB offshore business, and are the global hub for trade settlement in RMB, serving both banks and corporations worldwide. In the first seven months of this year, RMB trade settlement handled by banks in Hong Kong totalled RMB3.4 trillion. Through the use of RMB in cross-border trade with Mainland China, exporters and importers can better manage their exchange risks, and in return accumulate a pool of offshore RMB in Hong Kong. We welcome Brazilian enterprises to leverage our experience in offshore RMB business and settle your trade with Mainland China in RMB. This would help you manage the risks of exchange rate fluctuations and give more certainty to business transactions.
Building on our infrastructure for other international currencies, Hong Kong has developed a unique, highly efficient and reliable RMB clearing system, known as the Renminbi Real Time Gross Settlement (RTGS) system. Our system links up Mainland China, Hong Kong and financial centres globally, providing RMB services to financial institutions and corporations worldwide. It helps banks from all over the world make RMB payments. The value of payments that go through the system reached, on average, some RMB700 billion each working day. Hong Kong banks now handle some 70 per cent of global RMB payments (Note 1). More than 220 banks participate in this RMB clearing system, including three from Brazil. We launched the CNH Hong Kong Interbank Offered Rate fixing last year. It provides a reliable benchmark for the pricing of RMB loan facilities, and facilitates the development of an interest rate swap market. Market participants can now better manage the interest rate risk of their RMB business. In order to better serve international clients, our RTGS system has just extended its operating hours from 15 hours to 20.5 hours daily (i.e. from 8.30am Hong Kong time to 5am Hong Kong time of the next day) to cover also the Latin American time zone. We welcome more banks from Brazil to make greater use of our RMB wholesale platform to meet the demand for offshore RMB from their customers as the economic activities between Brazil and Mainland China increase. We also welcome Brazilian companies to open bank accounts in Hong Kong for RMB and other business. If they prefer to bank with institutions they are familiar with, Brazilian banks are encouraged to establish correspondent banking relationships with banks in Hong Kong so as to facilitate the RMB business of their clients.
With the expanding use of RMB in cross-border transactions, the offshore RMB business in Hong Kong has grown rapidly in recent years. As of July, our banks held RMB1.13 trillion in deposits and certificates of deposit. With the world's largest offshore RMB liquidity pool, we can help Brazilian individuals, corporations and financial institutions, whatever your RMB needs may be, for consumption, investment and capital requirements.
This brings me to the second part of the trilogy: RMB as an investment currency. Hong Kong has become the world's largest offshore RMB financing and investment centre. We featured a wide range of RMB offerings, from "dim sum" bonds and investment funds (both listed and unlisted) to insurance policies, currency futures, real estate investment trusts, shares and derivative products. In all, we host some 150 listed products denominated in RMB, and another 330 unlisted RMB products. With increasing market participation in offshore RMB business, we expect more RMB investment products coming on stream. These create ample investment opportunities for your asset and wealth management sectors.
Our deep RMB liquidity pool also provides a significant source of funding for Brazilian financial institutions and corporations. From 2007 to August this year, there have been 443 RMB bond issuances in Hong Kong, with an outstanding amount exceeding RMB370 billion. There has been a noteworthy expansion in the range of issuers. They include the Chinese Ministry of Finance, international organisations such as the World Bank and the Asian Development Bank, and multinational corporations such as McDonald's and Caterpillar from the United States, Unilever and Volkswagen from Europe, and two corporations from Brazil. We welcome more Brazilian financial institutions and corporations to meet their demand for RMB financing by issuing RMB bonds in Hong Kong. The Chinese Ministry of Finance has been issuing RMB sovereign bonds in Hong Kong since 2009. This year, the Ministry has decided to issue RMB sovereign bonds in Hong Kong totalling RMB28 billion through two tranches, each in the second and fourth quarter. In addition to bond issuance, our banks have seen remarkable growth in their RMB lending business, with the total amount of outstanding RMB loans more than tripling from RMB31 billion at end-2011 to RMB141 billion at end-July 2014. We welcome Brazilian financial institutions and corporations to make use of our RMB lending services.
The Chinese Central Government has introduced a number of special policies to facilitate cross-border RMB investments. The first one is on direct investment. Since 2011, Mainland Chinese enterprises can conduct outward direct investment (ODI) in RMB, whereas foreign direct investment (FDI) into Mainland China can also be made in RMB. In the first quarter of 2014, about 28 per cent of FDI into Mainland China, and about 13 per cent of ODI from Mainland China, was conducted in RMB. Hong Kong has long been the gateway for Mainland China's FDI and ODI, accounting for about 60 per cent of the flow in both directions. We welcome the Brazilian business community to take advantage of our platform to make direct investments in Mainland China.
The second special policy is the RQFII scheme in 2011. It opens the door to portfolio investment in Mainland China using offshore RMB. With an investment quota of RMB270 billion, financial institutions in Hong Kong are making use of their offshore RMB to invest in the stock and bond markets in Mainland China and manufactured RMB products in Hong Kong for offer to the international investors. These include exchange-traded funds (ETFs) on A-shares (i.e. shares traded on the Shenzhen and Shanghai stock exchanges). The ETFs are listed on our Stock Exchange and can be traded in RMB and Hong Kong dollars.
The third and most recent special policy is the Shanghai-Hong Kong Stock Connect Programme, which will further connect the capital markets in both places. It is expected to be launched later this month. Under Stock Connect, investors from Hong Kong and around the world will be able to trade directly on the Stock Exchange of Hong Kong 568 Shanghai-listed shares, whereas Mainland China investors will be able to trade directly on the Shanghai Stock Exchange 266 Hong Kong-listed shares. The programme will bring unprecedented opportunities to the financial world. Indeed, in a recent New York Times feature on the initiative, a senior Western banker in Asia called it "the single most important development in China's intention to internationalise this market." Upon the implementation of Stock Connect, international investors can invest in the Mainland China stock market through Hong Kong. You are most welcome to use our platform for RMB investments.
Another exciting development in the offing is the proposed arrangement for the mutual recognition of funds between Mainland China and Hong Kong. Good progress has been made and consensus reached between the regulators in both places. Once implemented, it will broaden our asset management repertoire and provide more investment options for offshore RMB. Under the proposal, qualified funds domiciled in, and operating from, Hong Kong would enjoy the status of "recognised Hong Kong funds" in the Mainland, and qualified Mainland funds would enjoy the status of "recognised Mainland funds" in Hong Kong. These recognised funds could then obtain authorisation on the basis of a streamlined process and be sold directly in the other's market. The arrangement will allow cross-border offering of funds in Hong Kong and Mainland China, and contribute to a wider choice of products to the investors in both markets. For Hong Kong in particular, our fund platform will be further enriched with more diversified products and activities. In this regard, we welcome funds to domicile in Hong Kong in order to tap the market potential in future.
Now let me turn to the third part of the trilogy: RMB as an international reserve currency. Steady progress has been made, with more central banks, including those in Malaysia, South Korea, Japan and Thailand, investing in RMB-denominated assets for their foreign reserves. Mainland China is gradually liberalising RMB as an international reserve currency through the bond issuing platform in Hong Kong. Since 2012, the Chinese Ministry of Finance has made special placements to overseas central banks for RMB sovereign bonds issued in Hong Kong.
The offshore RMB market is still limited, with deposits of some RMB2 trillion working out to only about 2 per cent of that onshore, much lower than the ratio of 30 per cent for offshore US dollar deposits. RMB now only accounts for a market share of 1.57 per cent in global payment, which is much lower than the market share of 73 per cent for the aggregate of US dollars and the euro (Note 2). If, however, you compare the size of the Mainland Chinese economy, which is 12 per cent of the world total, you would realise the growth potential of RMB as a payment currency in the years to come. Going forward, the expansion of trade and investment transactions in RMB will increase the size and liquidity of the offshore RMB market, and deepening of the offshore RMB market will provide more incentive and scope for overseas enterprises and financial institutions to conduct business and financial transactions in RMB.
So, yes, Hong Kong is best placed to leverage Mainland China's growth story and develop into a global offshore RMB hub. But there is still much to be done. We will continue to strengthen our market infrastructure and financial platforms to meet evolving market needs. We will also continue to pursue further policy initiatives with the Chinese Central Government to support RMB product innovation in Hong Kong, promote cross-border RMB loans under the capital account and improve our RMB clearing system. In parallel, we will spare no efforts to create a user-friendly environment for market participants. For example, we have modernised our companies law to facilitate business and enhance corporate governance. We have also updated our trust law. Settlors can now establish perpetual trusts in Hong Kong. In addition, we shall introduce fiscal incentives, such as providing profits tax exemption to offshore private equity funds and remove stamp duty on ETFs.
Ladies and gentlemen, as the first mover, Hong Kong has made a promising start in promoting offshore RMB business, which in turn helps broaden and deepen our market and open up new asset management opportunities. You could make use of our RMB infrastructure for furthering your RMB business alongside your huge trade with Mainland China. This would save exchange costs and transaction fees for forex derivative products, and minimise losses due to exchange rate fluctuations. Knowing well the needs of the asset management industry, we seek to provide appropriate legal and regulatory frameworks, as well as a clear and competitive tax environment. You could raise RMB through listing or issuing bonds in Hong Kong for financing investments in Mainland China. This would lower your fundraising cost and ensure greater flexibility in managing RMB funds raised in the offshore market. We welcome you to Hong Kong to explore first-hand the opportunities awaiting you. I truly believe it will be a win-win for all.
Thank you.
Notes:
1. Source: Society for Worldwide Interbank Financial Telecommunication.
2. Source: Society for Worldwide Interbank Financial Telecommunication; figures at August 2014.
Ends/Friday, October 3, 2014
Issued at HKT 13:08
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