Viewpoint

Renminbi Deposits in Hong Kong

Renminbi deposits are not yet a feature of Hong Kong's banking system. But their facilitation could well be beneficial both to the Mainland and to Hong Kong's development as China's international financial centre.

Last month, when Governor Dai of the People's Bank of China was speaking at a dinner hosted by the Hong Kong General Chamber of Commerce, he hinted at the possibility of licensed banks in Hong Kong accepting renminbi deposits. This subject generated considerable interest in the banking sector and the press, particularly when this was put in the context of Hong Kong as an ideal testing ground for the further liberalisation of the renminbi market or its convertibility, should these be considered desirable. For those who have a business (or any other) interest in the subject, I would like to draw their attention at least to our background thinking within the HKMA so as to assist them in positioning themselves for what, if anything, is likely to come.

I first raised the matter last year at a meeting with the State Administration of Foreign Exchange when leading the delegation of the Hong Kong Association of Banks. I did so, suspecting that there were perhaps increasing concerns, on the part of the Mainland authorities, about the lack of information on the flow of renminbi cash between the Mainland and Hong Kong, which made it difficult to assess the macro policy implications, if any, of such flows. One way of monitoring such flows was to entice them, through the payment of interest and the provision of banking services, into a system - the banking system - where proper records are kept. These records would provide the information, at an aggregated level, that would be useful for policy deliberations on the Mainland, while the established safeguards on banking privacy would preserve secrecy at the micro, customer level.

More importantly, at the back of my mind, I was hoping that this initiative would, if pursued, mean an enhancement of our financial infrastructure to enable Hong Kong, as the international financial centre in China, to capture any international financial intermediation activities denominated in renminbi. I have no doubt that the further liberalisation of the monetary and financial systems of the Mainland - a must for the maximising of economic growth and development, will generate a lot of such activities. We want the bulk of them to be organised in Hong Kong. It is of course far too early to be precise about how this strategy would play out, or about the elements in that financial infrastructure that would put us in that position. What I think is essential at this early stage is a safe and efficient channel whereby money, in whatever form, denominated in renminbi, can flow between the Mainland and Hong Kong, to the extent that the Mainland's policies permit. There should also be sufficient flexibility and adaptability in that channel to cater for the increasing volume and variety of flows, arising from changes in those policies, which will inevitably come, and come quickly.

For the time being, we aim to tackle the flow of renminbi cash through enticing it into the banking system. We should recognise of course that licensed banks in Hong Kong have always been free to accept deposits in any currency, so in that narrow sense we are not talking about any earth-shattering change. The reason why this has not been a significant feature of the banking system in Hong Kong is the inability of licensed banks to create renminbi assets on their books to match any renminbi deposit liabilities. There is, for example, no demand for renminbi bank loans for use in Hong Kong, although I am sure there is such demand in Hong Kong for the renminbi funds to be used in the Mainland. The task at hand is therefore to create a channel whereby renminbi deposits, when taken, could be directed to where there is demand, in the form of bank loans, or in other forms of financial intermediation. This would be a formal channel that would enable a renminbi relationship between the banking systems of the Mainland and Hong Kong to be established electronically. Discussions are continuing on how this could be done and, as engineers working on this financial infrastructure, we welcome views on the subject. It is then up to the banks as service providers and the non-bank sector as users of the service to position themselves for taking advantage of this channel in any manner they wish when it opens up.

Joseph Yam

7 March 2002