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10 years and counting - a decade of offshore Renminbi business (with photos)

     It's been 10 years since offshore Renminbi business was launched in Hong Kong.

     On February 25, 2004, banks in Hong Kong became the first globally to be able to provide personal customers with offshore Renminbi banking services. Since then, the city has firmly established itself as the pioneer and focal point for developing new products and promoting the widespread use of the Mainland China currency around the world.

     The Central Government's National 12th Five-Year Plan, adopted in March 2011, states support for Hong Kong's development as an offshore Renminbi business centre. In tandem with the introduction of measures from the Central Government, offshore Renminbi business in Hong Kong has been growing rapidly in recent years.

     "Internationalisation of the Renminbi has become a dominant trend with more and more activities in major cities around the world. This trend will gather pace with the Central Government's commitment to ongoing financial and economic reform," said the Financial Secretary, Mr John C Tsang.

     "Going forward, Hong Kong has a great opportunity to use its leading position as the centre for offshore Renminbi business in a way that not only benefits our city, but also our partners in the Mainland and around the world."

     The steady and impressive development of offshore Renminbi business not only reflects Mainland China's growing international economic stature and the Central Government's drive towards financial reform, but also highlights Hong Kong's critical role in the national development context.

A test case for "One Country, Two Systems"

     Under "One Country, Two Systems", Hong Kong maintains its own financial and legal systems separate from those of Mainland China.

     This includes full convertibility of the Hong Kong dollar, free flows of capital and a common law system underpinned by an independent judiciary. Hong Kong's well-developed financial system has strong international connectivity that includes 70 of the world's largest banks operating in the city.

     "With the support of the Central Government, Hong Kong has developed into the world's largest offshore Renminbi business hub, with the world's largest offshore pool of Renminbi funds. Through the development of Renminbi bonds, loans and equity products, Hong Kong has also become the largest offshore Renminbi financing and asset management centre," said the Secretary for Financial Services and the Treasury, Professor K C Chan.

     "Hong Kong is a leading global financial centre where international capital and investors congregate to lead a range of financial activities. Development of Hong Kong as a premier offshore Renminbi business centre provides a new growth driver for our equity market and asset management business."

Right time

     In recent decades, Mainland China's economy has expanded rapidly. In 1990, China's GDP was about US$400 billion. Today, it's about US$9 trillion.

     By 2011, Mainland China had overtaken Japan to become the world's second largest economy behind the US.

     In 2013, Mainland China leapfrogged the US to become the world's largest trading nation with the value of trade in goods exceeding US$4 trillion (RMB 24 trillion).

     The Society for Worldwide Interbank Financial Telecommunication (SWIFT) identified the Renminbi as the eighth most-used currency for payments in the world with a market share of 1.12 per cent in December 2013, up from 20th place and a market share of 0.25 per cent in January 2012.

     The onset of the global financial crisis in 2008 also shifted global economic attention towards emerging markets in Asia, in particular the vast Mainland China market.

     "As more multinational companies seek to establish a presence in the Asia Pacific and benefit from its enviable economic growth, Hong Kong's appeal as a regional centre for treasury functions is growing," said the Director-General of Investment Promotion at Invest Hong Kong, Mr Simon Galpin.

     "Minimal operational barriers facilitate the managing of liquidity and risk, and its strengths - its status as the leading offshore Renminbi hub, its position as an international financial centre, its reliable infrastructure and friendly tax regime - are key to Hong Kong's success not only as a gateway to Mainland China but to the region as well."

From offshore Renminbi personal banking to trade settlement and fund raising

     While some comparisons can be made with the expansion of the Eurodollar market from the mid-20th century, the internationalisation of the Renminbi is largely unprecedented, starting almost entirely from scratch.

     On February 25, 2004, banks in Hong Kong were, for the first time, able to provide personal customers with offshore Renminbi banking services including deposit taking, currency exchange, remittance and credit and debit card services.

     Earlier, on December 31, 2003, the People's Bank of China (PBoC) appointed the Bank of China (Hong Kong) Limited as the Clearing Bank for Renminbi business in Hong Kong.

     In January 2004, shops and ATMs in Hong Kong began accepting Renminbi debit cards and credit cards issued by Mainland banks.

     By end-2007, Renminbi deposits in Hong Kong reached about RMB 33 billion, representing a relatively modest but important pool of offshore Renminbi liquidity.

     In January 2007, the PBoC also gave the go-ahead for qualified Mainland financial institutions to issue Renminbi bonds in Hong Kong.

     This marked the launch of offshore Renminbi fund raising. Initially, only banks in Mainland China and Hong Kong were able to issue the so-called "dim sum" bonds. China Development Bank got the ball rolling with a heavily oversubscribed RMB 5 billion "dim sum" bond issue in July 2007.

     The more significant development of Renminbi liberalisation is trade settlement.

     "The introduction of the pilot scheme for Renminbi cross-border trade settlement in July 2009 was a watershed as Renminbi business in Hong Kong moved into its second stage of development," according to the Hong Kong Monetary Authority (HKMA) Chief Executive, Mr Norman Chan.

     "It expanded from serving personal customers to enterprises and institutions, and transformed from just one-way repatriation of Renminbi cashnotes to two-way flows of Renminbi, marking a crucial step forward to the internationalisation of Renminbi."

Growth spurt since 2010

     In July 2010, Hong Kong became the first place outside the Mainland to have an interbank market for Renminbi. Offshore banks were able to transfer Renminbi among themselves for the first time.

     In addition, businesses anywhere in the world could open an account in Hong Kong and freely exchange Renminbi.

     By August 2011, the pilot Renminbi trade settlement scheme (which initially covered the five Mainland cities of Shanghai, Shenzhen, Zhuhai, Dongguan and Guangzhou) was expanded to include all provinces throughout Mainland China.

     The value of offshore Renminbi trade settlement handled by banks in Hong Kong has increased more than 10-fold - from RMB 369.2 billion in 2010 to RMB 3,841 billion in 2013, which represents a lion's share of Mainland China's total Renminbi trade settlement.

     At end-2013, almost 4.5 million Renminbi deposit accounts had been opened in Hong Kong with an average deposit size of RMB 191,400.

     By the end of 2013, Hong Kong had built up by far the largest pool of Renminbi liquidity outside Mainland China, amounting to RMB 1,053 billion, including RMB 860 billion in deposits and RMB 193 billion worth of certificates of deposit.

     Currently, 216 banks participate in Hong Kong's Renminbi clearing platform, including 191 branches and subsidiaries of foreign banks and overseas presence of Mainland Chinese banks.

     In July 2010, the range of "dim sum" bond issuers expanded from Mainland financial institutions to local and foreign entities.

     McDonald's Corporation was the first foreign company to take a bite out of the "dim sum" bond market in September that year. Since then, the outstanding size of the offshore Renminbi bond market in Hong Kong has increased 4.6 times from RMB 56 billion at end-2010 to RMB 310 billion as of end-2013.

     In a further show of confidence, the Central Government has issued Renminbi sovereign bonds in Hong Kong between 2009 and 2013 with a cumulative value of RMB 80 billion.

Recent game changers

     In recent years, a number of game-changing elements have been introduced to further promote the flow of Renminbi outside Mainland China.

     In 2011, the Central Government introduced the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme to enable overseas investors to use offshore Renminbi deposits to invest in Mainland securities markets. The scheme's quota has been raised in stages from its initial level of RMB 20 billion to the current quota of RMB 270 billion.

     In March 2013, the RQFII scheme was widened significantly to include all financial institutions which are registered and have major operations in Hong Kong. As a result, a number of new Renminbi-denominated products and funds have been launched.

     In June 2013, the Treasury Markets Association launched the CNH Hong Kong Interbank Offered Rate (CNH Hibor) fixing. This provides a referencing benchmark for loan facilities and facilitates the development of new Renminbi-denominated financial products as well as hedging instruments.

     The cornerstone of Hong Kong's Renminbi infrastructure is the RMB Real Time Gross Settlement (RMB RTGS) system, which is capable of handling a huge volume of money quickly and reliably. It is linked to the China National Advanced Payment System (CNAPS).

     In June 2012, the daily operating hours of the RMB RTGS system were extended from 10 to 15 hours (8.30am to 11.30pm local time), covering Europe and the US.

     In just the past three years, the average daily turnover of the RMB RTGS system has increased by almost 100 times to nearly RMB 500 billion in December 2013.

Going global

     "To become an international investment or reserve currency, Renminbi asset and financial product markets of greater depth and breadth will be necessary for overseas entities to hold Renminbi over the longer run," Mr Norman Chan said.

     "Such development requires not just enabling policies but also promotion and innovation on the part of financial institutions."

     As China's global financial centre, Hong Kong is fully engaged in promoting the use of Renminbi in financial centres around the world.

     Since 2010, the Hong Kong Special Administrative Region (HKSAR) Government and the HKMA have staged a number of overseas roadshows to promote the internationalisation of the Renminbi.

     A number of private sector collaborative initiatives have been established between Hong Kong and overseas markets with a view to increasing Hong Kong's Renminbi business links with other parts of the world. These include a Hong Kong-London RMB Forum and dialogues with Australia and Malaysia.

The next phase

     To maintain and expand Hong Kong's role as a global Renminbi hub, the HKSAR Government will continue to:

* engage the Mainland authorities on the policy front to tap first mover advantage, thereby facilitating the cross-border use and healthy circulation of Renminbi funds and enriching our Renminbi platform with more diversified and innovative Renminbi business activities and products; and,

* strengthen the Renminbi business links with overseas markets and promote Renminbi business between Hong Kong banks and international financial institutions and corporates, as well as provide Renminbi services to overseas financial institutions and corporates at the wholesale level.

     General consensus with the relevant Mainland authorities has been reached on the mutual recognition of funds. Once finalised, the arrangement will open a new avenue in Hong Kong for local and foreign companies to reach individual investors in the Mainland. This will provide access to a whole new market for offshore Renminbi business and promote further diversification of Renminbi-denominated fund products.

Hong Kong's RMB portfolio (figures at end-2013, unless otherwise stated)

* RMB 1,053 billion worth of Renminbi deposits and certificates of deposit in Hong Kong

* 216 banks participating in the Renminbi clearing platform in Hong Kong, of which 191 are branches and subsidiaries of foreign banks and overseas presence of banks in Mainland China

* RMB 3,841 billion worth of Renminbi trade settlement handled by banks in Hong Kong

* Total value of Renminbi bonds issued in Hong Kong reached RMB 410 billion since 2007

* Outstanding amount of Renminbi bonds amounted to RMB 310 billion

* Total number of Renminbi denominated insurance policies in Hong Kong reached 156,183

* 26 unlisted authorised RQFII funds with assets under management (AUM) of RMB 13 billion (end-December 2013), and 11 RQFII exchange-traded funds on the Stock Exchange of Hong Kong with AUM of RMB 37 billion (end-January 2014)

Ends/Friday, February 28, 2014
Issued at HKT 17:10


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