Internationalization of the Renminbi to Benefit Hong Kong
Increasing the use of Renminbi for trade settlement
As the U.S. subprime crisis morphed into the current global economic malaise, the attention of investors has largely been centered on the various stimulus packages, with China’s four trillion Yuan package being the most eyeball-grabbing. Flying lower on the radar, but which we opine may be of greater significance, are the longer-term plans resulting from the Chinese government’s re-evaluation of its role within the global economic order. One of these is its intent to make Shanghai an international financial and shipping center by 2020 and, to pave the way for this, make the Renminbi (“RMB”) a fully convertible international trade currency. The process to encourage wider use of the RMB abroad is well under way. China signed its first currency swap agreement, with South Korea, in December 2008, and now has such contracts with six countries including Hong Kong, making it possible for importers of Chinese goods to borrow RMB from their central banks. Around the same time, it also started to allow the settlement of trade in RMB by companies in Hong Kong, Macau, and the ASEAN countries, on a trial basis.Ultimately, we expect that Shanghai may compete with Hong Kong, and the latter might have to find a role for itself as the former becomes a financial hub. For the next few years, however, we envisage that Hong Kong should be a significant beneficiary.
As an established financial centre with a robust legal system, Hong Kong is the frontrunner to become an offshore RMB settlement centre. In this role, its banks should benefit from RMB lending and additional fee income. The ability to settle foreign trade transactions in RMB should reduce currency risk for enterprises and encourage trade settlement in Hong Kong. Issuance of RMB bonds should facilitate debt capital market development, and there is also speculation about the setup of a commodities exchange to support China’s burgeoning demand for natural resources. With the capital market developments, we anticipate that more liquidity, currently invested abroad, should begin to flow back to Hong Kong.
Benefits to Hong Kong and China
Down the line, further liberalization to allow freer flow of funds in and out of China should be expected. Investment restrictions on inward foreign direct investment will likely be lifted and China may permit the issue of Chinese depositary receipts by non-Chinese companies. The fund management industry is also likely to proliferate as the Chinese invest more of their growing wealth in domestic and foreign capital markets. While the future is unlikely to happen exactly as envisaged, the likelihood and indeed, inevitability, of some of these developments and expectations of RMB appreciation provide incentive for early accumulation by investors. Demand for RMB assets, including RMB bonds, H-shares, B-shares, and stocks with large assets bases in China is likely to grow. All of this necessitates the movement of financial, legal, accounting, auditing, and wealth management professionals to the city to support the larger and increasingly diverse financial sector. Coupled with some relaxation in laws permitting the Chinese to visit and reside in Hong Kong, domestic consumption and in particular, the property sector, should receive a substantial lift. In view of this, the fund has begun to take overweight positions in Sun Hung Kai properties and Wharf holdings.
In the haze of the current financial crisis, there has been little market analysis of these developments and their implications. Even though Hong Kong and China have performed well in recent months, we do not believe that the market has begun to factor in the potential impact of RMB internationalization. In anticipation of scrutiny and awakening of more investors, we have begun to position in Hong Kong Exchanges & Clearing Ltd in the funds to take advantage of what should be a major transformation of global financial markets.
