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Acting Financial Secretary Prof KC Chan
The year 2014 marks the 10th anniversary of the offshore renminbi market, which was born here in Hong Kong 10 years ago. Hong Kong's development into the largest offshore renminbi centre has been achieved in tandem with successive measures from the Central Government.
Starting as a renminbi 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 renminbi investment and risk-management products serving the entire offshore market.
As the first offshore location to provide renminbi banking services, we started to offer deposit-taking, currency exchange, remittance and card services in 2004. This was when renminbi 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 RMB1.085 trillion, forming the largest pool of offshore renminbi liquidity in the world.
The continued growth of renminbi 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 renminbi fundraising and settlement centre. The first ever offshore renminbi bonds were issued that year.
Meeting market demand
By the end of February, 371 such "dim sum" bonds had been issued, with an outstanding balance totalling RMB338 billion. If we include the renminbi loans made in Hong Kong, the size of our renminbi debt market stood at RMB458 billion. Through this process the renminbi 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 renminbi 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 renminbi interest rate benchmark, it has played a key role in the development of the offshore renminbi loan and interest rate derivatives market.
The renminbi 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, renminbi-denominated trades worth RMB3.841 trillion were settled by banks in Hong Kong, growing by 46% year-on-year. According to SWIFT, the renminbi overtook the Swiss franc as the world's seventh payment currency, with Hong Kong handling 73% of the activity, in January.
Offshore access
Finally, the Renminbi Qualified Foreign Institutional Investor, or RQFII, scheme introduced in Hong Kong in 2011 placed the renminbi firmly on the map of investment currencies, allowing offshore access to the onshore equity and fixed-income markets.
Making use of the RMB270 billion worth of quotas granted, renminbi-denominated investment funds mushroomed in Hong Kong. By the end of 2013, the number of RQFII funds reached 43, with RMB52.4 billion under management. Among them 29 were exchange traded funds, or ETFs, listed on the Hong Kong stock exchange, providing much needed liquidity for investors.
Making good use of Hong Kong as a platform, the renminbi 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 renminbi centre, much in accordance with the vision of the 12th Five-Year Plan of the Central Government promulgated in 2011.
Globalisation march
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 renminbi 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 renminbi two weeks ago, barely four months after the plenary meeting.
The year 2013 also set the stage for the next phase in the renminbi's march towards globalisation. Policies that had been well-tested in Hong Kong were expanded to other offshore financial centres. renminbi 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 renminbi's further opening.
Driving development
There is much work to be done. Despite spectacular growth in the past decade, the overall size of the offshore renminbi market is still miniscule compared to the onshore market.
The renminbi's share of global payments was only 1.39% of the world's total by value in January. Only 18% of China's external trade was settled in the renminbi 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 renminbi market can only grow as fast as the renminbi 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 renminbi business in different parts of the world.
Taking advantage of their own respective strengths and circumstances, some cities will specialise in serving the renminbi 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 renminbi 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, the number of banks participating in the renminbi clearing platform in Hong Kong had reached 216. Of these, 191 were branches and subsidiaries of foreign or Mainland institutions.
Fostering co-operation
In fact, only about 10% of all renminbi transactions conducted using our renminbi 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 renminbi Real Time Gross Settlement (RTGS) system from 6.30pm to 11.30pm to provide European institutions with an extended window to settle offshore renminbi payments. Arrangements have also been made with London, Australia, Paris and Malaysia to foster co-operation on renminbi-related businesses.
Further development of the offshore renminbi 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 renminbi. Lower costs will give more businesses the incentive to invest, transact and raise funds in the renminbi.
I have given you a quick overview of the status of the offshore renminbi 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 renminbi era in the years ahead.
Acting Financial Secretary Prof KC Chan gave these remarks at the HSBC Forum: China Globalising, Renminbi Rising.
