Hong Kong and London can coexist as offshore yuan centers
Updated: 2015-10-19 09:15
By Peter Liang(HK Edition)
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On the eve of President Xi Jinping's state visit to the United Kingdom, there was speculation in Hong Kong financial circles about the People's Bank of China's (PBOC) plan to issue yuan-denominated sovereign bonds in London.
The proposed sale, first reported by Bloomberg on last Wednesday, will be the first time the central bank has issued renminbi notes outside China. Quoting unnamed sources, Bloomberg reported that PBOC's offering, which is being arranged by Industrial and Commercial Bank of China and HSBC Holdings, is scheduled to occur by early November.
Bankers in Hong Kong said that they had expected PBOC to broaden the sovereign bond market beyond Hong Kong, where the development of the market for long-term fixed interest securities has been constrained by the shortage of local government bonds. This could help generate trading activities. The Hong Kong market is believed to lack the ability to attract large-scale sovereign bond issues.
The issuing of sovereign bonds in London could greatly help enhance the renminbi's role in global trade and finance. It could be an important part of the yuan internationalization strategy.
Some Hong Kong bankers and economists have predicted the focus of the strategy will shift to London. They believe London will soon overtake Hong Kong as the largest offshore renminbi market. If this is the case, what are the implications for Hong Kong?
To answer this, it is necessary to retrace the development of Hong Kong as an international financial center from the 1970s. At that time, London was already well-established and was the only offshore US dollar center. It recycled the export earnings of the European economies and oil-producing countries in the Middle East. Despite London's dominance, Hong Kong, and Singapore, found a niche for their respective financial markets. This was to service the capital needs of the emerging economic powerhouses which shared their time zone.
The regulatory groundwork for establishment of a financial center was laid in the mid-1970s. After this, banks in Hong Kong quickly seized the many business opportunities arising from the insatiable demand for loans by governments and businesses - particularly South Korea, Taiwan and Indonesia. Hong Kong then became Asia's premier loan syndication and booking center. This initial success attracted more foreign banks to come and help expand markets in foreign exchange, fund management and equities.
Hong Kong was the major source of direct capital investments on the mainland for many years after the start of economic liberalization. Many mainland enterprises have continued to come to Hong Kong to raise capital and secure bank loans.
With sufficient self-confidence, Hong Kong has never had the desire to brag about this. Losing out to Singapore as the largest center for this or that was never a great concern. Nobody seriously cared about this when serious money could be made.
But in recent years, a growing sense of self-doubt - fanned by politicians and commentators impatient at the slow pace of economic integration with the mainland - has spread throughout the business community. They repeatedly questioned the relevance of Hong Kong to the mainland's economic development. This is despite the fact that many more mainland enterprises are coming to Hong Kong to raise capital and use the city as a springboard for overseas expansion.
A banker recently criticized Hong Kong banks for their lack of innovation in developing the offshore renminbi market. She, like many other skeptics, failed to offer any suggestions regarding innovation. In this discussion, it is important to remember that the aggregate amount of offshore renminbi in Hong Kong is capped. Its use is prescribed by a set of rules. So this leaves little room for bankers to innovate.
Instead of seeing London as a potential threat, Hong Kong should welcome the opportunities that will be generated by the wider use of renminbi in global trade and investment. This will benefit all offshore centers.
The pie is now getting bigger. As a well-established offshore yuan center, Hong Kong is well-positioned to secure a fair share. Whether it is the largest such center or not is really inconsequential.
The author is a veteran current a airs commentator.
(HK Edition 10/19/2015 page7)