Eddie Yue: The development and future of the offshore Renminbi market
Welcome remarks by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary
Authority, at the Third Meeting of the Hong Kong - London RMB Forum, Hong Kong,
26 September 2013.
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The Right Honourable Greg Clark MP, Distinguished Guests, Ladies and Gentlemen:
1. I would like to extend a very warm welcome to all of you to this seminar, which is
organised as part of the Third Meeting of the Hong Kong - London RMB Forum. The Forum
was launched in January 2012, and it aims to foster cooperation between Hong Kong and
London on the development of offshore RMB business. By improving linkages between our
two financial centres, it is hoped that the Forum could help to further deepen and broaden
the offshore RMB market, and to better enable businesses and financial institutions to
capture the opportunities arising from the increased channels for transacting with China.
2. Significant progress has been made in the development of the offshore RMB market
since our first meeting in May 2012. It is encouraging to see that market practitioners are
making use of the policy headroom to develop RMB products and services to meet their
customers' needs. Opportunities in RMB are also being factored into the decision-making of
many businesses and financial institutions.
3. Here, instead of focusing on recent developments in RMB, I would like to take a
broader and more forward-looking view. In particular, China's financial sector reforms and
specifically the eventual opening up of its capital account would likely have profound
implications for the global financial landscape. It would be interesting to view RMB
developments from the perspective of these potential changes - what do they mean for the
global financial landscape and what would be the role of the RMB amid these developments.
4. As we are all aware, China has been moving steadily with financial sector reforms
and capital account liberalisation, taking steps towards allowing market forces to play a
greater role in its financial system. Recently, the Chinese authorities re-affirmed their
commitment to further financial reforms, including the easing of market access, the
liberalisation of interest rates, as well as working towards eventually making the RMB
convertible under the capital account. And this process has reached an interesting juncture.
The future reform and liberalisation efforts will arguably have a greater impact on the global
financial landscape than that of measures undertaken so far.
5. As China moves further along the path to open up its capital account, the channels
for interaction with global financial markets would broaden and become more efficient. Over
the past decade or so, as China rose to become the second largest economy, we have all
seen the changes to world economic relationships brought about by China's integration into
the global economic system. We are now beginning to see China's integration into the global
financial system in a more prominent way.
6. Until now, the channels for cross-border flows are only open to current account
items such as trade, and to direct investments under the capital account. Portfolio
investments under the capital account into and out of China are mainly confined to
designated channels and are subject to quotas, for example, the Qualified Foreign
Institutional Investor (QFII) scheme with quotas totalling US$150 billion, and the Qualified
Domestic Institutional Investor (QDII) scheme with quotas of US$87 billion. It can be
reasonably expected that a further opening of the capital account would entail liberalisation
of these channels and the addition of new avenues. These would result in an increase in
cross-border capital flows.
7. Although it may not be easy to provide a precise estimate of the magnitude of the
flows, given that China's economy is the second largest in the world, and taking into account
the size of both its domestic savings and its capital markets, one can probably say that the
size of capital flows resulting from China's capital account liberalisation would likely be felt in
the global financial system.
8. From the perspective of Chinese savers, given their high level of savings and the
fact that their investment options are mostly limited to domestic markets at present, there
would be a desire on their part for investment diversification into international markets. The
resulting investment flows, as they are liberalised, could be substantial for individual markets
where these funds flow into.
9. In the other direction, with China being a dynamic and sizable economy, the world's
investors would be increasingly keen about participating in China's capital markets, thereby
gaining exposure to new investment opportunities. The experience of many other economies
also suggests that capital-account liberalisation brings along with it a deepening of financial
markets, making them even more attractive to investors.
10. In all of this, the role of the RMB will be crucial. Notwithstanding the current, only
partial convertibility of the RMB, it is already the ninth most actively traded currency
according to the latest Bank for International Settlements Triennial Survey. And the RMB has
advanced to rank eleven as world payments currency according to SWIFT, a financial
messaging service provider. Meanwhile the RMB is being added to the foreign exchange
reserves of an increasing number of economies.
11. In terms of international transactions where RMB can already play a role, such as in
trade settlement and foreign direct investment, transactions in RMB have climbed steadily.
Today, some 13 percent of all of China's trade transactions are settled in RMB and about
15 to 20 percent of foreign direct investment into China is conducted in the currency. Bearing
in mind that the RMB trade-settlement pilot scheme was only introduced in 2009, this is an
impressive achievement in such a short space of time. And there is plenty of room for further
expansion of these numbers.
12. The greater use of RMB in international transactions will be closely related to
China's financial reforms and liberalisation, with new fund flow channels being opened up in
RMB. For example, the RMB QFII scheme allows offshore institutions to use RMB funds to
invest in Chinese capital markets, and it is a new channel in addition to the US dollar-based
QFII scheme. And further to a recent relaxation, outflows under the QDII scheme can also be
made in RMB. Such developments, in turn, will bolster the use of the RMB in trade, foreign
direct investment and international transactions, thereby supporting the further development
of the offshore RMB market.
13. While recent developments in RMB have been exciting, given the possible scope of
future expansion, we are probably still only at the early stage of what could be more
significant changes in the years to come. After all, RMB deposits and bonds outstanding in
the offshore market only account for about one percent of onshore deposits and outstanding
debt respectively. The possibility for expansion remains substantial.
14. One of the aims of the Hong Kong-London Forum is to assess what all this means to
the financial institutions and to corporates - many of whose representatives are gathered
here today.
15. For corporates, especially those already having business links with China, it is
important to get prepared for the increasing use of RMB as a currency for transaction,
financing and investments. Indeed some companies have already begun to adapt their
internal systems and processes so that they are able to make greater use of RMB, both in
dealing with their Chinese counterparts and in their own financial management. This
integration of RMB in their business decisions has in many instances served to strengthen
their trade and investment links with China.
16. For financial institutions, things are also in motion. It can be envisaged that the
intermediation and servicing of capital flows into and out of China present fresh new
opportunities, not least with the entry of a whole new grouping of investors into international
capital markets. Also, with the institutional management of household savings being
relatively low in China at present, an increase to levels more commonly observed in other
economies would signify a great deal of opportunities for the asset management sector.
17. Hong Kong, being the gateway to China, has become the hub for cross-border asset
management, and it has been a natural base for the managers of QDIIs, QFIIs and RQFIIs.
As we look ahead, while the investments funds are coming through Hong Kong as a first
step, it does not mean that the flows necessarily have to stop here. As a global financial
centre and an important base for asset management, London makes a natural partner for
Hong Kong when it comes to serving the growing needs of Chinese investors when they start
investing into a wider array of markets and instruments. And similarly, London and Hong
Kong could explore synergies when it comes to sourcing the funds for investments into
China.
18. I hope I have given you a taste of the many possibilities that lay before us as the
RMB moves into the international financial landscape. This is a very exciting juncture and I
hope that we - financial institutions, businesses, policymakers - would work together to
address some of the issues that may inevitably come up along the process while creating
values out of this collaboration. To begin with, today's seminar is a good opportunity for us all
to share experiences in RMB and to learn from each other. Let me once again extend the
warmest welcome to all of you.
19. Thank you.