Norman T L Chan: What does it take to develop a Global Offshore
RMB Hub?
Speech by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at
the Treasury Markets Summit 2014, Hong Kong, 15 September 2014.
* * *
1. A very warm welcome to all of you to this year's Treasury Markets Summit.
2. The theme of today's Summit is: "Development of Hong Kong as the Offshore
Renminbi Hub". This is indeed a very timely topic as we have just marked the
5th anniversary of the launch of the pilot scheme for the use of renminbi (RMB) in
cross-border trade transactions in the summer of 2009. We of course started the
RMB banking business back in 2004, but until 2009 our business was restricted to
the development of personal accounts for Hong Kong residents and use of credit
cards. The major milestone was clearly the start of offshore RMB trade settlement
and other businesses for corporates five years ago.
3. So what have we accomplished in the last five years? It is probably fair to say that
very few of us could have envisaged the rapid progress that we have achieved in
turning Hong Kong into the global offshore RMB business hub in such a short time.
In terms of deposits, including Certificate of Deposit (CDs), we have grown from
around RMB90 billion in end-June 2010 by nearly twelve times to RMB1.1 trillion
now, which makes us the largest offshore RMB liquidity pool in the world. In trade
settlement, Hong Kong banks handled a phenomenal amount of RMB2.9 trillion in
the first half of 2014, as compared to the total amount of Mainland's external trade
settled in RMB of RMB3.3 trillion in the same period. Hong Kong has also become
the largest issuance hub of offshore RMB bonds or Dim Sum bonds, with a total of
93 issuances in the first six months of this year, amounting to RMB130 billion in
value. The total amount of outstanding RMB bonds issued in Hong Kong amounted
to RMB380 billion at end-June this year. In addition, the forex and financial
derivative markets for RMB have grown steadily over these few years, which,
20th
according to SWIFT, have raised RMB from the position of the most used
7th
payment currency to the position lately. Most strikingly, the value of payments that
go through our RMB Real Time Gross Settlement system has registered a
phenomenal growth, reaching an average of around RMB700 billion each working
day.
4. I won't bore you further with the numbers as I am sure you are very familiar with
them. Surely it is useful for us to pause, look back, take stock and try to think of
ways in which we can continue to excel as we go forward from where we are. So
without further ado, let me quickly turn to the main theme of my remarks this
morning: "What does it take to build a successful global hub for offshore RMB
businesses?" The key to success, if I may summarise it, lies in the acronym: "PIPs".
5. "PIPs" stands for "Policy Headroom, Infrastructure and People/Products". Let me
cover these three elements in the reverse order. For People and Products, I have
said many times that for any financial centre to thrive and out-compete other
centres, the crucial building block would be its people and products. It goes without
saying that a world class financial centre must have the right people designing and
distributing the right products that serve the needs of the financial consumers. This
is an important and core component of the soft power that I have been talking about
in the last few years. It is a key attribute that differentiates a global hub from the
other financial centres. People and Products fall into the area in which the financial
industry, including the individual firms, practitioners and industry bodies like the
TMA, can and should play a dominant role. I am sure that you will agree with me
that policy makers and regulators, while having the responsibility to safeguard
financial stability and to accord appropriate protection to financial consumers, are
not really well suited to get too involved in gauging market demand and designing
financial products that would best meet the requirements of the consumers.
6. Having said that, policy makers and regulators do have a crucial role to play in
respect of Policy Headroom and Infrastructure, which are the first two elements of
"PIPs". Let me elaborate further.
7. Clearly there could not be any offshore RMB markets if the Mainland did not make a
move in 2009 to change its policy of not allowing the use of RMB in cross-border
trade and other transactions. But of course, the Mainland authorities were and still
are understandably wanting to open up the capital account on an incremental basis,
taking one step at a time. When one looks back at the last five years, the scope and
breadth of the cross-border flow of RMB have been progressively and steadily
expanded. While we have come a long way from 2009 and there have been many
policy changes in this period that help the offshore market to move forward, I would
like to highlight four major milestones of policy headroom expansion that made it
possible for the incremental development of RMB markets offshore. The first one is
the RMB trade settlement pilot scheme I mentioned at the beginning. Then comes
the relaxation in the use of RMB for foreign direct investments into the Mainland and
outward direct investments by Mainland corporates starting in 2011. Then channels
for RMB portfolio investment flows have also been created, such as the RMB
Qualified Foreign Institutional Investors (RQFII) scheme, so that offshore investors
can invest in the onshore bond and equity markets. The fourth and most recent
milestone is the Shanghai-Hong Kong Stock Connect Programme, which will enable
Hong Kong and overseas investors to invest in A-shares listed in Shanghai through
Hong Kong, and Mainland investors to invest in Hong Kong shares through
Shanghai. This marks a significant step in the liberalisation of the Mainland's capital
account, and will increase the flows of RMB between the onshore and offshore
markets and propel the development of offshore RMB business in Hong Kong to
new highs. As far as the HKMA is concerned, we have used our best endeavours to
work with the People's Bank of China (PBoC) and other relevant Mainland
authorities to continually expand the policy headroom that would enable Hong Kong
to continue to thrive as the global hub for offshore RMB businesses.
8. Lastly, let me turn to the second element of the key to success in developing into a
global offshore RMB hub, i.e. market infrastructure. I can think of four key
components: (i) efficient clearing and settlement systems, (ii) robust and yet market
friendly regulatory regime, (iii) financial benchmarks (such as CNH fixings) and
(iv) liquidity. In the interest of time, I would skip the first three components and just
focus on the fourth. As we all appreciate, in terms of financial market development,
liquidity is essential. We also know that liquidity breeds further liquidity. Without
ample market liquidity, it is hard for any financial centre to flourish or maintain a
competitive edge. We of course are acutely aware of the importance of promoting
market liquidity, especially in the early stages of our development of the CNH
market. It was against this background that the HKMA has all along taken a
proactive approach in seeking to strengthen the liquidity of the CNH market in Hong
Kong. In June 2012, the HKMA launched a Repo facility to provide one-week funds
for banks in Hong Kong as a backstop to facilitate banks' liquidity management.
However, the facility was for T+2 settlement and did not fully address the needs of
the banks. In order to assist bank treasurers to better manage their liquidity, the
HKMA shortened the settlement of the repo to T+1 in January 2013 and again to
T+0 in July 2013.
9. Today, I am pleased to announce that, in preparation for the imminent launch of the
Shanghai-Hong Kong Stock Connect, the HKMA will implement two additional
measures as backstop facility to assist banks in Hong Kong in managing their RMB
liquidity:
(a) In addition to what the BoC HK, as the RMB Clearing Bank, is providing to the
Participating Banks through intraday overdraft, the HKMA will provide an
intraday Repo facility of up to RMB10 bn to banks in Hong Kong. The HKMA
will charge a fee, based on the actual time used during the day, for the use of
the facility. The purpose of the HKMA intraday liquidity facility is to promote
more efficient RMB payment flows between banks; and
(b) The HKMA will also designate a number of banks active in the CNH market as
Primary Liquidity Providers (PLPs). Banks that are designated as PLPs are
committed to using and developing Hong Kong as the global platform for
supporting their offshore RMB businesses. They are also committed to
expanding their market-making activities in CNH market. In return, the HKMA
will offer a repo line to each of the PLPs so as to facilitate more efficient
liquidity management when they carry out market-making and other business
activities in the CNH market. This bilateral repo line can be used by the PLPs
as intraday or overnight liquidity management purposes. The HKMA is now
finalising the list of PLPs and the necessary documentation. We hope to be
able to announce the list of PLPs very shortly.
10. Ladies and gentlemen, let me conclude by saying that the competitive edge of a
successful financial centre depends crucially on its soft powers, not just on hard
infrastructure. Hong Kong is uniquely well positioned to take advantage and play a
pivotal role in the new era of China's growth story and in the internationalisation of
RMB. Hong Kong enjoys both first-mover advantages as well as many irreplaceable
structural advantages, given Hong Kong's very close links with the Mainland in
trade, investment and finance under the "One Country, Two Systems" principle.
However, there is absolutely no room for complacency. As this new era of RMB
internationalisation has just begun, we still have a long, long way to go as the
offshore RMB markets continue to grow and mature, while the capital account
controls in Mainland China are being gradually relaxed or lifted. In the early stages
of this new era, the primary task of Hong Kong is to develop the CNH market and at
the same time work with other financial centres such as Sydney, London or Paris to
grow the pie, leading to win-win outcomes. As we move into the more mature stages
of the internationalisation of RMB, the available policy headroom should be quite
2nd 3rd
ample for the markets to flourish. At that time, the and elements of PIPs, i.e.
Infrastructure and People/Products, would matter a great deal more if Hong Kong
wishes to retain its competitive edge over the others. It will be up to our industry,
financial firms and market practitioners to out compete the other centres in terms of
product innovation and distribution of various financial products and services that
best serve the needs of their clients. I am sure that the TMA, with the support of its
members and the financial industry, will continue to play a leading role in developing
the professionalism of the practitioners and in facilitating product innovation. Thank
you.
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