Eddie Yue: The development and future of the offshore Renminbi market
Keynote address by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary
Authority, at the Euromoney Global Offshore RMB Funding Forum 2013, Hong Kong, 8 May
2013.
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Tony (Shale)1 Richard (Morrow),2 Distinguished Guests, Ladies and Gentlemen,
Good morning, and thank you all for coming. I'm honoured that Euromoney has invited me to
speak at the Global Offshore RMB Funding Forum for the second year in a row. I recognise
many familiar faces in the audience today, and I note the presence of a wide range of
panellists who will no doubt examine the offshore RMB market from every possible angle and
perspective.
Here in Hong Kong - the world's premier offshore RMB business centre - we have had a
front row seat to watch the offshore RMB market take shape over the past few years. Since I
last addressed this forum in May 2012, this market has continued to expand and evolve at a
dizzying pace, which will provide for an interesting and timely dialogue today.
However, before we get into what will be a spirited discussion, I want to use my role as the
opening keynote speaker to take a step back and gain a broader perspective of
developments to date. I also want to look at the macro context, which is likely to play a major
role in shaping future developments.
As we consider the possibilities for the offshore RMB market, it is instructive to review the
development of the Eurodollar market. What are the key underlying elements that have
driven the growth of the Eurodollar market and how do they feature in the current offshore
RMB market environment?
The Eurodollar market as a comparison
A close examination of the differences and similarities between the two markets can help
shed light on how offshore RMB market activities might evolve as well as how its further
development can be fostered. Let's compare the two markets using four sets of
characteristics.
Economic weight and trade centrality
The first set of characteristics involves economic weight and trade centrality.
The Eurodollar market is an offshore market for the currency of a country that has both.
Similarly, the offshore RMB market is supported by China's rapidly expanding economy and
its substantial trade links with other parts of the world, given its status as the world's second
largest economy and largest trading nation.
Indeed, these are two important macro trends that are driving offshore RMB market activities
now and in the future. In roughly three years since the relevant policies were liberalised,
currently some 10% of Mainland China's total trade, about 12% of foreign direct investment
into China and about 4% of outward direct investment from China are settled in RMB.
Compare this with the fact that about 30% of Japanese trade is settled in yen, 50-60% of
euro area trade is settled in euros, and 80-90% of US trade is settled in US dollars. Clearly
there is the potential for more RMB transactions - especially trade and direct investment
transactions where regulations have been liberalised - to be carried out internationally. And
we can trust that China's economic development and its global links will continue to be at the
forefront in the coming years to support a full spate of offshore market activities.
Currency convertibility and onshore financial market depth and liquidity
The second set of characteristics involves currency convertibility and onshore financial
market depth and liquidity.
The Eurodollar market is an offshore market of a convertible currency and supported by
extensive links with deep and liquid onshore financial markets.
On the other hand, the offshore RMB market is a market of a currency that is not yet fully
convertible, and the links with the onshore financial markets are still subject to limitations.
The RMB is convertible in respect of the current account and certain capital account items
such as direct investments, while other flows like portfolio investments can only be
conducted under specified quotas.
The opening up of even more channels for two-way flows between the onshore and offshore
markets would be required to spur offshore RMB activities. A few years ago, these ideas
would have sounded difficult, but today we are edging ever closer to realising many of them,
which is indicative of the rapid pace of change in the offshore RMB market. But as we all
recognise, this will be a paced process and not something that would or should happen
overnight.
On this front, the HKMA has been engaging with Mainland Chinese authorities on further
expanding fund flows between the onshore and offshore RMB markets. And I am pleased to
say that significant progress has been made. Most recently, the quota for the RMB Qualified
Foreign Institutional Investor (RQFII) scheme was expanded by RMB200 billion, bringing the
total to RMB270 billion. The Qianhai cross-border lending pilot scheme was also launched,
enabling companies incorporated in Qianhai to borrow RMB loans from banks in Hong Kong
for uses relating to the development of Qianhai.
I look forward to the further streamlining of policy arrangements so that all cross-border
transactions currently settled in US dollars can have the option to be settled in RMB also.
This in turn could be followed by the continued relaxation of cross-border flows of RMB into
and out of Mainland China along with the liberalisation of China's capital account. The
relaxation of capital account restrictions, the expansion of the offshore RMB market, and an
increase in the financial depth of the onshore markets can be mutually reinforcing and
beneficial to the growth of the offshore RMB market.
Intermediation among non-residents
The third set of characteristics involves the provision of intermediation among non-residents.
The Eurodollar market provides efficient intermediation among non-residents. For example, it
allows for Eurodollar bonds to be issued by non-US entities and bought by non-US investors.
To an increasing extent, the offshore RMB market is functioning as a platform for RMB
financial activities conducted by non-residents. The pool of RMB deposits in Hong Kong,
being deposits of mainly non-Mainland individuals and corporates, is exceeding RMB 800
billion. Adding to that is the dim sum bond market, which has a size of RMB 260 billion at
present. Offshore RMB bonds are being issued by Mainland Chinese entities as well as
multinationals, and they are being bought by offshore investors. At the same time, banks in
Hong Kong are extending RMB loans to customers, with the outstanding amount of such
RMB loans currently stands at close to RMB90 billion.
As the market deepens and a greater variety of RMB products become available offshore,
we will eventually see more RMB intermediation within the offshore markets, especially as
non-Chinese residents become willing borrowers of RMB. However, for that to happen, work
on different fronts needs to be pursued and market efficiency furthered through innovative
solutions and active participation by different market players. I anticipate this could play out
in three dimensions:
• First, there will be a need to facilitate the further development of the RMB banking
market so that offshore RMB liquidity can be efficiently allocated, which would
enable banks in need of RMB to easily obtain it from banks with surplus liquidity. We
can already see the market moving in this direction as banks begin to diversify and
expand their RMB assets progressively. Meanwhile, the introduction of a
crossborder collateral management arrangement opens an efficient channel for financial
institutions to widen their liquidity sources and obtain offshore RMB liquidity from
Hong Kong, using even non-RMB papers for repos.
• Second, there will also be a need to facilitate the development of RMB capital
markets. On this front, Hong Kong's dim sum bond market has shown encouraging
development. Already, multilateral companies and international financial institutions
such as the World Bank and the Asian Development Bank have tapped the dim sum
bond market. For the market to develop further, there will be a need to continue to
broaden the participation of both issuers and investors. Additionally, the tenor and
variety of debt instruments will need to increase to meet the financing requirements
of different issuers while satisfying the appetites of different investors. There has
been repeated RMB sovereign bond issuance by the Ministry of Finance and more
regular issuance in due course will help to gradually build a benchmark yield curve.
In the meantime, I am pleased to note that the first RMB equity securities have been
listed on the Hong Kong Stock Exchange.
Third, there will also be a need to enhance the price discovery process and related
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market infrastructure for RMB transactions. This will mean introducing the necessary
benchmarks for RMB transactions in the offshore market, including an exchange
rate fixing, interest rate fixing and various kinds of benchmarks for RMB
investments. The Treasury Markets Association introduced spot USD/CNH fixing in
June 2011, and they recently announced the June 2013 launch of CNH HIBOR
fixing. This welcome development will provide a reliable benchmark to price loan
facilities and facilitate the development of the offshore RMB interest rate swap
market.
Global hubs and linkages
The fourth and final characteristic - the presence of a network of global hubs and linkages -
is especially apt for all of us in this room today as we consider Hong Kong's role in the
nascent offshore RMB market.
The Eurodollar market, which originated in London, is made up of different hubs connected
by extensive links. London remains a major centre, while other hubs serve other time zones
and networks, and together they form an integrated whole through the free flow of funds.
In 2004, Hong Kong was the first offshore market to launch RMB business, and since then it
has provided an efficient and reliable settlement platform from which trade settlement is
conducted, RMB liquidity built up, financing activities arranged and a wide range of RMB
products developed.
As the RMB becomes more widely used internationally, other markets that complement Hong
Kong's central role are emerging around the world. Cooperation between these different
markets is conducive to growing the whole market, and we are seeing increasing linkages
being set up to facilitate the flow of funds between the markets.
These increasing linkages are the result of several encouraging trends, including the fact that
financial institutions in different financial centres have strengthened their business networks
in order to serve customers' RMB needs. For instance, the operating hours of Hong Kong's
RMB Real Time Gross Settlement system have been lengthened, providing the capability to
serve the settlement of offshore transactions in the European timezone and early business
hours in North America. We at the HKMA are also conducting a range of outreach activities
to strengthen Hong Kong's RMB business links with other parts of the world. These include
conducting roadshows to showcase Hong Kong as the offshore RMB business centre, as
well as facilitating private sector-led forums and dialogue meetings with authorities in
Australia and London. These and other initiatives have encouraged actions to enhance
various financial services, including RMB liquidity management and settlement
arrangements, between markets in different parts of the world.
Concluding remarks
As I mentioned at the outset, I had the privilege of delivering the keynote address at last
year's Global Offshore RMB Funding Forum as well. In my remarks of a year ago, I
mentioned that we are at a period of historic transition with regard to the development of the
offshore RMB market.
Looking at the development of the Eurodollar and offshore RMB markets side-by-side, as we
just did, gives us a unique perspective on how things might play out in the long run. Indeed,
as the offshore RMB market reaches maturity, there will no doubt be volumes of literature
written by financial historians that compare the birth and development of these two markets.
While developments so far have been encouraging, we are still at the initial phase of RMB
offshore market development. The policy headroom to develop RMB business is already
present, and we at the HKMA will continue to provide a safe and efficient financial
infrastructure for the conduct of RMB offshore activities. But the most important of all, I would
encourage businesses and financial institutions to make full use of such opportunities
already available and promote the development of a wide range of RMB services and
financial products. Forums like this one help us prepare for the future by examining what has
transpired, making comparisons and exploring business opportunities and collaborative
initiatives.
I am eager to work together with all of you in shaping what is to come.
Thank you.