Speech by Acting FS at HSBC Forum: China Globalising, RMB Rising (English only)

     Following is the keynote speech delivered by the Acting Financial Secretary, Professor K C Chan, at the HSBC Forum: China Globalising, RMB Rising today (March 27):

Stuart (Gulliver), distinguished guests, ladies and gentlemen,

     Good morning. It is my great pleasure to join you all today at the HSBC Forum 2014. A warm welcome to you all, particularly those who flew here to join us today. With China's economy continuing to expand at an enviable rate, the rise of the Renminbi (RMB) is always a timely topic, especially in this part of the world. I would like to take today's opportunity to share with you a few thoughts on the next steps for the RMB as a currency and the role Hong Kong will play in this process.

     The year 2014 marks the 10th anniversary of the offshore RMB market, which was born here in Hong Kong 10 years ago. Hong Kong's development into the largest offshore RMB centre has been achieved in tandem with successive measures from the Central Government. Starting as a RMB banking centre offering traditional banking services to local residents, Hong Kong then grew into an offshore debt-raising and trade settlement centre. As the market continued to open, we soon became the international centre for offshore RMB investment and risk management products serving the entire offshore market.

     As the first offshore location to provide RMB banking services, we started to offer deposit-taking, currency exchange, remittance and card services in 2004. This was when RMB began to be accumulated offshore, and there has been no looking back. By the end of January 2014, the aggregate amount of deposits and certificates of deposit in Hong Kong had reached RMB 1,085 billion, forming the largest pool of offshore RMB liquidity in the world. The continued growth of RMB liquidity in Hong Kong and elsewhere has been the fundamental driving force behind further innovations in the offshore market.

     In the subsequent phase, starting in 2007, we consolidated our function as a RMB fund-raising and settlement centre. The first ever offshore RMB bonds were issued that year. By the end of February 2014, 371 such "dim sum" bonds had been issued, with an outstanding balance totalling RMB 338 billion. If we include the RMB loans made in Hong Kong, the size of our RMB debt market stood at RMB 458 billion. Through this process the RMB was established as a funding currency in the offshore market, where interest rates are determined entirely by market forces.

     Tools to manage the associated exchange and interest rate risks arose to meet market demands. As early as 1996, offshore non-deliverable forwards linked to the RMB were traded over the counter between institutions in Hong Kong. In 2005, these contracts were offered to local retail customers for the first time. A liquid market for options and cross-currency swaps has also evolved. In June 2013, the Treasury Markets Association of Hong Kong started publishing the Hong Kong Interbank Offered Rate, or HIBOR fixing. As the first offshore RMB interest rate benchmark, it has played a key role in the development of the offshore RMB loan and interest rate derivatives market.

     The RMB began taking on the role of an international trading currency in 2009 with the introduction of the cross-border trade settlement scheme. This scheme allowed trading companies to manage foreign exchange risks, while putting in place a mechanism for the cross-border bilateral flow of the currency. Last year, RMB-denominated trades worth RMB 3,841 billion were settled by banks in Hong Kong, growing by 46 per cent year-on-year. According to SWIFT, the RMB overtook the Swiss franc as the world's seventh payment currency, with Hong Kong handling 73 per cent of the activity, in January 2014.

     Finally, the RMB Qualified Foreign Institutional Investor (RQFII) scheme introduced in Hong Kong in 2011 placed the RMB firmly on the map of investment currencies, allowing offshore access to the onshore equity and fixed income markets. Making use of the RMB 270 billion worth of quotas granted, RMB denominated investment funds mushroomed in Hong Kong. By the end of 2013, the number of RQFII funds reached 43, with RMB 52.4 billion under management. Among them 29 were exchange traded funds (ETFs) listed on the Hong Kong stock exchange, providing much needed liquidity for investors.

     Making good use of Hong Kong as a platform, the RMB was thus established as a rising international funding, trading and investment currency within a few years. At the same time, Hong Kong has developed into the largest offshore RMB centre, much in accordance with the vision of the 12th Five-Year Plan of the Central Government promulgated in 2011.

     Further financial reforms are crucial for China's continued transformation into a consumption-driven economy. The Central Government renewed its policy commitments when it set out the national reform blueprint for the next decade during the Third Plenum last November. The meeting called for an orderly and risk-managed opening of the RMB capital account, along with further liberalisation of the foreign exchange and interest rate formation mechanisms. As if to demonstrate its resolve, the authorities doubled the trading band for the RMB two weeks ago, barely four months after the plenary meeting.

     The year 2013 also set the stage for the next phase in the RMB's march towards globalisation. Policies that had been well-tested in Hong Kong were expanded to other offshore financial centres. RMB clearing banks were appointed in Taipei and Singapore. And in October, the RQFII scheme was expanded to London and Singapore.

     However, financial opening will not happen overnight and the process is likely to be bumpy. Moreover, the timing and co-ordination of various reform initiatives is a fine balancing act. But, building on its strong track record of market development and policy innovation, Hong Kong is ready to play a vital role in the RMB's further opening.

     There is much work to be done. Despite spectacular growth in the past decade, the overall size of the offshore RMB market is still miniscule compared to the onshore market. The RMB's share of global payments was only 1.39 per cent of the world's total by value in January 2014. Only 18 per cent of China's external trade was settled in the RMB in 2013. These numbers still fall short of China's status as the world's largest trading economy and its second largest economy.

     The capacity of the offshore RMB market can only grow as fast as the RMB is adopted as a payment, investment and reserve currency on a global basis. As an international financial centre well-connected with other financial hubs in the world, we warmly welcome the development of RMB business in different parts of the world. Taking advantage of their own respective strengths and circumstances, some cities will specialise in serving the RMB needs of a certain region, while others will focus on supporting the business from a particular time zone. Either way, the size of the overall RMB offshore market will grow larger as a whole.

     Hong Kong stands ready to work with other offshore partners in this endeavour. By the end of January 2014, the number of banks participating in the RMB clearing platform in Hong Kong had reached 216. Of these, 191 were branches and subsidiaries of foreign or Mainland institutions. In fact, only about 10 per cent of all RMB transactions conducted using our RMB Real Time Gross Settlement (RTGS) system represented cross-border transactions between the Mainland and Hong Kong in May 2013. The remainder were entirely offshore transactions between two offshore parties. In 2012, the Hong Kong Monetary Authority extended the operating hours of our RMB Real Time Gross Settlement (RTGS) system from 6.30pm to 11.30pm to provide European institutions with an extended window to settle offshore RMB payments. Arrangements have also been made with London, Australia, Paris and Malaysia to foster co-operation on RMB related businesses.

     Further development of the offshore RMB market beyond Hong Kong is also beneficial from a competitive perspective. Increased competition will help improve the quality of service provided and drive down the cost of transacting in the RMB. Lower costs will give more businesses the incentive to invest, transact and raise funds in the RMB.

     Ladies and gentlemen, I have given you a quick overview of the status of the offshore RMB market, the authorities' commitment to press on with reform and the versatility of Hong Kong as a platform. With reform comes opportunity. I advise you to tighten your seat belts in readiness for a much more dynamic and competitive RMB era in the years ahead.

Ends/Thursday, March 27, 2014
Issued at HKT 11:27