Eddie Yue: Towards RMB internationalisation - the role of Hong
Kong markets
Opening keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority,
at the Hong Kong Institute of Bankers (HKIB) Annual Banking Conference 2021, 29 September
2021.
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Distinguished guests, members and friends of Treasury Markets Association (TMA), ladies and
gentlemen,
1. Thank you for having me at this event. It is my pleasure to deliver my keynote speech at the
Treasury Markets Summit 2021.
Opening
2. We should all take it as a blessing that against the shadow of the pandemic, we could still
host this annual event today to exchange views. The pandemic has brought profound and
lasting changes to our lives, but not all of them are negative. I notice for instance that
several people around me have been hiking more frequently during the pandemic and even
maintained it as a habit. It is beautifully ironic that during this period of restrictions, we have
had the opportunity to be outdoor more often and to interact with nature. As we enjoy and
rediscover the astounding scenery and diversity of our landscape, it is difficult to not
appreciate the harmony in nature or, if you prefer a more precise description, the harmony in
the co-existence and interdependence of living organisms. One example is the bee and the
flower: the bees need flowers for food and flowers depend on the bees for pollination. They
live in harmony by helping each other survive and evolve. There is a term for it - mutualism,
describing a mutually beneficial relationship between living things. And let me explain why I
am talking about biology in a financial forum to begin with.
3. I have always longed to find an appropriate way to describe the financial relationship
between Hong Kong and the Mainland. In my view, Hong Kong's dynamic with the Mainland
is truly unique in that it is a dynamic which no other pair in the world shares. In the financial
world, our win is their win and their win is ours. As financial competition amongst the world's
hubs continues, Hong Kong and the Mainland have long enjoyed a mutually beneficial
relationship. Sounds familiar? Yes, perhaps neither of us are exactly the same as a bee or
a flower, but Hong Kong and the Mainland share a very similar dynamic as them in the
financial world - one of mutual benefit.
RMB internationalisation: Hong Kong stands out
4. And that brings me to the topic that I want to discuss in more detail today, which is the
internationalisation of the RMB. With the continuing growth of the Mainland economy and its
increasing financial integration with global markets, it is natural that RMB will be increasingly
th
used in international transactions. The 14 Five-Year Plan has made clear that promoting
RMB internationalisation should be conducted in a prudent manner, based on a
marketdriven approach.
5. But first of all, what does RMB internationalisation have to do with the mutually beneficial
relationship between the Mainland and Hong Kong that I have just mentioned?
6. To answer this, let's first talk about how Hong Kong, as an offshore RMB centre, has
contributed to the internationalisation process. Very few will dispute that offshore markets
have played and will continue to play a very important role in the process of RMB
internationalisation. Indeed, if we look close enough, the internationalisation of a currency
and the development of offshore markets often go hand in hand. If a currency has the
potential to be an international currency, it will show it in offshore markets. Not only that, the
presence of offshore markets will actually help establish and reinforce the global status of a
currency. It is hard, for instance, to imagine that the US dollar could attain its current status
without a fully developed Eurodollar market.
7. But then what's so special about us? Hong Kong is not the only RMB offshore market, but
we are the one which stands out from our global peers in offshore RMB business. And we
offer very unique value propositions such as being part of China and staying well connected
to the world, a sound legal and regulatory system, a deep and liquid capital market, a robust
financial infrastructure, and a wealth of financial intermediaries and talent. All these
underpinnings shape what we are, namely Asia's leading international financial centre (IFC),
asset management centre and risk management centre. And it's also this broad-based
leadership that makes Hong Kong well placed to help the Mainland achieve the objective of
promoting RMB internationalisation, while at the same time further reinforces our status as
an IFC in the process. This is precisely the mutualism I just referred to.
8. At this point it's worthwhile to first take stock of where we stand as an offshore RMB hub:
•
We have the largest offshore RMB pool of over RMB800 billion, providing liquidity support to globa
Hong Kong is a trade settlement hub, processing RMB6.3 trillion in 2020, up 18% from 2019, and c
to date.
•
Hong Kong continues to maintain its top position in offshore RMB FX trading, with an average daily t
in April 2019 according to the latest BIS Triennial Survey. This is equivalent to 30% of global trad
Mainland.
•
The city has maintained its leading position for RMB SWIFT payments, with more than 70% of glob
processed through Hong Kong.
•
The dim sum bond regained momentum in the recent few years after a slowdown in issuance arou
witnessed encouraging developments over the past few years, such as with the regular bond and bill
of Finance and the People's Bank of China (PBoC). The upcoming issuance by Shenzhen municipal g
yet another new category of Mainland issuers.
Time to give internationalisation another push
9. All these facts and numbers suggest that Hong Kong has the strongest foundation on which
we can launch further efforts to advance the progress of RMB internationalisation.
10. The timing is also right - with the Mainland's economic growth continuing to outperform.
Macro aside, portfolio flow is another major driver. We are seeing increasing capital flows
into the Mainland markets by international investors, driven by the inclusion of RMB assets in
global indices and also the attractive yield pick-up and diversification benefits. In the other
direction, there is also an increasing need for Mainland investors - be they individuals or
institutions - to more efficiently manage their wealth and diversify the allocation through
outward investments. A good part of these two-way portfolio flows will be conducted in
RMB, and through Hong Kong.
Some thoughts on "How"
11. So far, the level of the international use of RMB remains relatively low, and is not
commensurate to the Mainland's economic strength. For example, the Mainland is already
the world's largest trading nation, but the use of RMB for cross-border trade settlement is
only in the range of 15 to 20% of its total trade volume. Some will argue that in order to
further boost the usage of RMB in trade settlement, we will need to see more active use of
RMB as an investment currency in capital market transactions. It is only when you have the
right place to invest your money that you will have the incentive to use and hold the currency
you gain from merchandise and services trade. In other words, RMB internationalisation
could first be driven by the advancement of its function of store of value, which should in turn
help promote greater usage of RMB as a unit of account and a means for payment and
settlement for other purposes like trade. And Hong Kong is well positioned to help catalyse
this process.
12. The question is "how". We see three factors that are required to promote the use of RMB in
capital market transactions in Hong Kong. These are liquidity, products and infrastructure.
13. First is liquidity, which has to be the most essential ingredient in developing markets.
Without that, it would be hard for the market to conduct transactions smoothly and efficiently
or to develop products. As I mentioned earlier, Hong Kong has the largest RMB deposit
base among all offshore markets and the most active RMB FX market, and both have been
growing steadily in the last few years, partly benefiting from the very strong growth in the
turnover of the Stock and Bond Connect schemes. For example, the Stock Connect
received an average daily turnover of RMB160 billion in the first eight months of this year, up
43% increase from last year. The Bond Connect received an average daily turnover of
RMB26 billion during the same period, up 34% from last year. At the central bank level, the
HKMA has a swap arrangement with the PBoC, which is the largest in size globally. This
swap line could serve as an effective back-stop liquidity facility to support the development of
our RMB offshore market.
14. But more liquidity is just part of the equation. We also need more products to put the liquidity
to productive use. This brings me to the second factor to build markets, which is products.
We need to develop more RMB-denominated products in our equity, bond and wealth
markets.
15. The continuous enhancement of the Connect schemes will help create this product
diversity. For example, by opening up the new Southbound channel of the Bond Connect, we
will expand the investor base of our bond market, which will in turn attract more liquidity in
secondary trading as well as more primary issuance activities. And this will help reinforce
the growth of our dim sum bond market in depth and diversity. Similarly, we are hopeful that
the launch of the Wealth Management Connect will create room for more innovation in
wealth management products, including those denominated in RMB which, according to
some surveys, are favoured by potential Mainland customers.
16. What about equity products? Together with other regulators, we are now studying market
proposals about enlarging the use of RMB in our stock market trading. Given that the stock
market constitutes an important part of our financial market, promoting the use of RMB in
this segment would help drive underlying RMB FX, derivatives or financing activities and
enrich the RMB product space in Hong Kong. What needs to be thought through, however,
is how to drive the demand from both issuers and investors, and how to ensure price
convergence and reduce the risk of market fragmentation if there are parallel counters in
both RMB and HKD for Hong Kong-listed stocks. We hope to be able to come up with some
practical suggestions soon.
17. The third factor that is needed is an efficient and robust infrastructure. The financial blueprint
and plumbing underpinning our system is the unsung hero of our success as a financial
centre. Without it, liquidity will be denied and product innovation will never leave the planning
room. The RMB infrastructure in Hong Kong is the most developed one among the offshore
markets. We have the RMB RTGS system in place since June 2007, and the daily turnover
through the system now amounts to over RMB1.5 trillion, which is already larger than that of
its HKD counterpart. The equities and bond clearing and settlement systems in Hong Kong
also already have capabilities to process RMB transactions, and both are linked to the RMB
RTGS system to achieve Delivery versus Payment settlement.
18. With the introduction of the Stock and Bond Connects, the cross-boundary infrastructure
linkages between the clearing houses of the two markets have become the critical
foundation on which cross-boundary transactions can be efficiently cleared and settled. The
Central Moneymarkets Unit (CMU) operated by the HKMA is now linked to the Mainland
central securities depositories (CSDs) on the one hand and the international CSDs (ICSDs)
on the other. We have embarked on a multi-year enhancement programme to modernise
the system to enable CMU to perform all functions required of an ICSD. Operating window
will be expanded; a wider spectrum of corporate action services will be offered; and the
system will enable the CMU to directly provide collateralised lending and FX services to
nonbank participants.
19. Apart from these three factors, i.e. liquidity, product and infrastructure, which are essential to
building a vibrant RMB offshore market in Hong Kong, I should add that supervisory
collaboration is also important in this gradual opening-up process. Many of the initiatives to
promote the international use of RMB will involve the opening up of the Mainland's capital
accounts. This must be done in a gradual and risk-controlled manner, which is why you
often see quota and eligibility criteria in the initial stage of the Connect schemes. This kind
of risk-control features requires the close collaboration between the HKMA and our Mainland
counterparts. Through such collaboration, we seek to ensure that Hong Kong is a safe and
reliable platform to take forward these new cross-boundary initiatives.
20. Some of the ideas that I have just mentioned will take time to materialise. Some may need a
testing ground to pilot before being scaled up. On this, the Guangdong-Hong Kong-Macao
Greater Bay Area or Qianhai could function as pilot zones in the Mainland to test new
crossboundary initiatives with Hong Kong. The Wealth Management Connect is a case in point.
Conclusion
21. Ladies and gentlemen, what I have presented to you is a very brief summary of our thoughts
on the role of Hong Kong in promoting the international use of RMB, but even that, I am sure
you will agree, is already quite a menu. And we are already actively exploring some of these
policy initiatives with our Mainland counterparts. But we cannot do it all on our own. While
we need to create the necessary policy headroom, the market should be the one driving the
process of RMB internationalisation. The active participation of market players is critical. I
would therefore warmly welcome views and suggestions from Members of TMA and its
subcommittees on ways to enhance the liquidity, to expand the product diversity and to build an
efficient infrastructure in order that we can further develop the role of the Hong Kong markets
in the process of the internationalisation of the RMB.
22. With its 76 institutional members and over 3,000 individual members, the TMA has been
providing broad-based support to foster market development in Hong Kong. We believe the
HKMA and the TMA's relationship can also be a mutually beneficial one. As you can
probably tell by now, the internationalisation of the RMB poses many unique opportunities for
Hong Kong and it is time to do our part. We continue to look to the TMA's active participation
in this journey for Hong Kong.