Offshore RMB development in Hong Kong [相容模式]
Transcript of Offshore RMB development in Hong Kong [相容模式]
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Offshore RMB development in Hong Kong: A look into the Eurocurrency experience
Ricky ChoiSenior Research AnalystEABFU
The views and analysis expressed in this paper are those of the author, and do not necessarily represent the views of the Economic Analysis and Business Facilitation Unit.
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Outline
Eurocurrency market development
Eurodollar’s ‘success’ and USD’s strong international status
Other factors driving Eurodollar and Euroyen marketdevelopment
RMB’s potential as an international currency and theassociated costs and benefits
RMB business in Hong Kong and Hong Kong’s role in RMBinternationalisation
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Eurocurrency (Eurodollar and Euroyen) market development
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Defining the Eurocurrency marketBank loans to/deposits from
Residents Non-residents
A B
C D
A: Domestic banking: Residents in domestic currency
B: Traditional foreign banking: Non-residents in domestic currency
C+D: Eurocurrency banking: Both residents and non-residents in foreign currency
B+D: International banking: Non-residents in both domestic and foreign currencies,but do not include all Eurocurrency transactions
Domesticcurrency
Foreigncurrency
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Estimating Eurocurrency market size: Using BIS data
Bank loans to/deposits from Residents Non-residents
A B
C D
Domesticcurrency
Foreigncurrency
In early years, BIS estimated the net size of Eurocurrency market(EC) which had been adjusted for interbank activities (e.g.redeposit by banks) to prevent overestimation
However, it is no longer available after 1980. The external andlocal positions in foreign currency are used to estimate theEurocurrency market size
1964-66, 1968:
1967, 1969-80: EC
Starting from 1981:
EC: Net size of Eurocurrency market (C+D), Local(FC): Local positions in foreign currency (C), Ext(FC): External positions in foreign currency (D)
( )19801977)()(
)()(_.−
⎟⎟⎠
⎞⎜⎜⎝
⎛
+×+=
FCFCFCFC LocalExt
ECLocalExtECEst
196720101977)(
)()()(
20101977)(
)()()(_.
⎟⎟⎟⎟⎟⎟
⎠
⎞
⎜⎜⎜⎜⎜⎜
⎝
⎛
⎟⎟⎠
⎞⎜⎜⎝
⎛×+
×⎟⎟
⎠
⎞
⎜⎜
⎝
⎛⎟⎟⎠
⎞⎜⎜⎝
⎛×+=
−
−
FC
FCFCFC
FC
FCFCFC
ExtLocal
ExtExt
ECExt
LocalExtExtECEst
Similarly, the Eurodollar and Euroyen market size are also estimated based on the above method
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Eurocurrency, Eurodollar and Euroyen market size
- Eurodollar accountedfor over 80% of theEurocurrency marketin the early days
- Declined to around60% after mid 1990s
- Euroyen accountedfor just 7.5% at itspeak in 1999
*The data coverage of Eurocurrency/Eurodollar markets expanded significantly in 1983 to include a number of financial centres, suchas Hong Kong, Singapore, and Cayman Islands etc
Eurocurrency and Eurodollar markets*
0
2,000
4,000
6,000
8,000
10,000
12,000
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 20080%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%US$ billion
Eurodollar's share ofEurocurrency market (RHS)
Other Eurocurrencies (LHS)Euroyen (LHS)Eurodollar (LHS)
Euroyen's share of Eurocurrencymarket (RHS)
Source: Bank for International Settlements (BIS)
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Eurodollar market reached around 50% of domestic market size
- Eurodollar wasonly 1/10 of USdomestic market inthe early 1970s
- Expanded rapidlyto around 50%over the pastdecades
*Interbank activities were included in US banking sector liabilities before 1973. The data coverage of Eurodollar market expandedsignificantly in 1983 to include a number of financial centres, such as Hong Kong, Singapore, and Cayman Islands etc
Eurodollar market and US banking sector size*
0
2,000
4,000
6,000
8,000
10,000
12,000
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 20080%
10%
20%
30%
40%
50%
60%
70%
80%US$ billion
Eurodollar market size (LHS)
US banking sector liabilities(ex-interbank) (LHS)
Eurodollar market as a percentageof US banking sector (RHS)
Source: BIS
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Euroyen market reached nearly 8% of domestic market size at its peak
- Euroyen was smallwhen comparedwith Japandomestic bankingsector
- Peaked at 7.6% in2007
*The data coverage of Euroyen market expanded significantly in 1983 to include a number of financial centres, such as HongKong, Singapore, and Cayman Islands etc
Euroyen market and Japan banking sector size*
0
2,000
4,000
6,000
8,000
10,000
12,000
1977 1981 1985 1989 1993 1997 2001 2005 20090%
1%
2%
3%
4%
5%
6%
7%
8%US$ billion
Euroyen market as apercentage of Japanbanking sector (RHS)
Euroyen market size (LHS)
Japan banking sector liabilities(ex-interbank) (LHS)
Source: BIS
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Eurodollar market is disproportionately large when compare to US economic size
*The data coverage of Eurodollar/Euroyen markets expanded significantly in 1983 to include a number of financial centres, such asHong Kong, Singapore, and Cayman Islands etc
- In addition to GDP,results were similarfor other economicparameters, such astrade and ODI stocketc
Source: BIS, World Bank
Eurodollar/Euroyen market size ratio and US/Japan GDP ratio*
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
US /Japan GDP ratio
Eurodollar/Euroyen market sizeratio
15.4
2.7
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Eurodollar’s ‘success’ and USD’s strong international status
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What is an international currency?
An international currency should serve several functionsMedium of exchange
By private sector: used directly or as a vehicle currency in foreigncurrency exchanges between two other currenciesBy official sector: as a vehicle for currency market intervention
Unit of accountBy private sector: invoice merchandise trade and denominate financialtransactionsBy official sector: define exchange rate parities
Store of valueBy both private and official sectors: hold the international currency andinvest in financial assets denominated by the international currency(reserve assets)
JPY13.5%
Others41.5%
USD45.0%
CNY0.0%
Others45.8%
USD43.4%
JPY10.9%
EUR19.6%
JPY9.5%
CNY0.5%
USD42.4%
Others28.0%
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USD and JPY’s share in world foreign exchange turnover
1989 1998 2010
USD is the most actively traded currency in the world. JPY is also anactively traded currency
Source: BIS
USD56.1%
Others41.8%
JPY2.1%
Others43.3% USD
52.0%
JPY4.7%
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USD and JPY as a unit of account:% of world trade
USD is the dominant trade denomination currency in the world
1980 1995
Source: Currency competition and foreign exchange markets: the dollar, the yen and the euro by Philipp Hartman (1998) and Theimplications of the introduction of the Euro for non-EU countries by Peter Bekx (1998)
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USD has long been a unit of account to define exchange rate parity
- Under the BrettonWoods system, allcurrencies werefixed to USD
- USD still definedthe exchange rateparity for 50% of allcurrencies afterBretton Woods
- This ratio hasgradually declined to8% recently
- However, JPY hasnever been a unit ofaccount to defineexchange rate parity
*Only includes economies without a separate legal tender or adopt a currency boardarrangement due to lack of data. Data on anchor currencies of various pegs (including theabove two) became available in 2008, out of which the proportion of currencies using USD asanchor was at 30%Projected based on data from IMF (1979, 1981, 1989, 1999, 2002 and 2008) and EuropeanCommission's paper no. 26: The implications of the Introduction of the Euro for non-EUcountries (1975 and 1993)
Share of currencies pegged to USD*
0%
10%
20%
30%
40%
50%
60%
1975 1980 1985 1990 1995 2000 2005
8%
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USD and JPY as a store of value:% of world official foreign reserves
- Given US economicpower and its large anddeep financial market,USD assets have alwaysbeen a majorcomponent of officialforeign reserves
- USD accounted forover 60% of foreignexchange reserves inthe world over theyears and peaked at85% in 1970s
*Excluding foreign currency reserve without a specific currency
Distribution of currencies as foreign currency reserves*
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
USD
JPYEUR
% of world
61.4%
26.3%
3.8%
Source: International Monetary Fund (IMF)
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US specific non-economic factors drive USD to be an international currency
The dummy would reflect the effect of simply being the US whileholding the economic condition constantResults indicate that the US dummy variable was significant for allcombinations, suggesting that there are US specific non-economic factorsthat drive USD to be an international currency
where Y is an international currency indicator, D is the defined dummy variable and X is a matrix of economic variablesincluding GDP, GDP per capita, export, import, trade, ODI stock, IDI stock and these variables expressed as share of the world
tttttt XDY εββ +++= 21c
Bearing in mind the disproportionate size of the Eurodollar market tothe US’s economic status, indicators for an international currency(currency’s share of foreign exchange turnover, foreign exchange reservesand invoicing in world trade) were tested against a dummy variable forthe US and combinations of economic variables of countries includingChina, Japan, the UK, Germany and the US :
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What drove the USD to be an international currency?
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Bretton Woods system favoured the use of USD as a unit of account
The international monetary system used after WWII until 1971
A gold dollar systemUSD pegged to goldAll other currencies fixed to USD with 1% fluctuation marginsUSD became the unit of account to define the parities
USD position relatively unchanged after Bretton WoodsHigh switching costNo other alternative to fully replace USD
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US has relatively lax exchange controls
Absence of restrictions on international financial transactions using thecurrency
The US had no exchange controls for most of the past few decadesexcept for some partial controls in mid 1960s-early 1970sOther major economies, such as the UK and Japan, still maintainedcontrol over cross-border investment and capital transfer
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US has the world’s largest and deepest financial markets
The US has the world’s largest and deepest financial markets in the worldBroad (with wide variety of financial instruments) and deep (having well-developed secondary markets)Can satisfy the investment preference of different global investors’ (officialand private)
Source: Wilshire Associates (Wilshire 5000 is used for US in 1970-85), CEIC (Japan figures in 1970-85, UK figures in 1972-85)
0
500
1,000
1,500
2,000
2,500
1970 1975 1980 1985
USJapanUK
US$ billionStock market capitalisation
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Given USD and JPY’s international position, what other factors drive the Eurodollar and Euroyen development?
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Some political factors favoured offshore market development
Factor favourable to the Eurodollar market onlyCommunist and Arab countries (1950s-1960s) were reluctant to placetheir assets in the US after WWII and Suez War respectively
Factor favourable to both the Eurodollar and the Euroyen marketsThe two oil shocks (1973 and 1979) led to the massive accumulation ofoil dollars which fostered international fund flows and Eurocurrencymarket development
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Regulatory factors: Liberalisation of exchange control may foster offshore market development
Generally, exchange controls impede the development of offshorefinancial activities
But given the international currency status of USD, partial exchangecontrol measures did not fully restrict offshore market development
Empirical evidence suggest that certain US onshore regulatory controlsin the domestic financial market has a positive effect on the growth ofthe offshore market
The liberalisation of exchange controls and the financial system in Japanhad once fostered the development of Euroyen market
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Partial exchange controls did not restrict offshore market development given USD’s position
Notes: - Interest Equalization Tax was a tax specifically targeted on foreign stocks and bonds so as to equalize the US and Europeanyields on stocks and bonds at that time
- Voluntary Foreign Credit Restraint Program was a virtually mandatory measure which prevented American banks fromincreasing their loans to European and Japanese companies
- Mandatory Foreign Investment Program forbade domestic financing of foreign investment by the US multinationals
- US had no exchangecontrols except IET,VFCRP and MFIPin 1960s
- The Eurodollarmarket stilldeveloped rapidlyamid partialexchange control
% growth
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Eurodollar market growth
Interest Equalization Tax (IET) (1963-1973)Voluntary Foreign Credit Restraint Program (VFCRP) (1965-1973)Mandatory Foreign Investment Program (MFIP) (1968-1973)
Statistical distortion due toexpansion of data coverage
Source: BIS
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Reserve requirements and deposit insurance reduced the efficiency of financial intermediation in the US
- Reserve requirementand FDIC insuranceadded to domesticfunding costs
- This would widenthe bid/ask spreadof domestic funding
- The wider thespread the morefavourable it is forEurodollar marketdevelopment
% growth
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Eurodollar market growth
Domestic - Eurodollar reserve requirement
Statistical distortion due toexpansion of data coverage
Favourable to Eurodollar development
Source: BIS
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Interest rate control in the US made it profitable to go offshore
- US market interestrates were abovecontrolled interestrates before 1978
- The interest ratedifferentialencouragedEurodollar activities;empiricallyrelaxation of suchcontrols impededoffshore activities
- No precise data onthe interest rateceiling in Japan wasavailable forcomparison
12%
15%
18%% growth
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010-6%
-3%
0%
3%
6%
9%Saving deposit ceiling for UScommercial banks (RHS)
Gradually phasing outthe interest rate ceiling
Abolition of interest rate ceilingEurodollar market growth (LHS)
Domestic certificateof deposit rate (RHS)
Favourable to Eurodollar development
Statistical distortion due toexpansion of data coverage
Source: BIS
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Liberalisation after 1984^ led to rapid development of the Euroyen market in the following years
^Liberalisation measures include but not limited to1984 June:-Short-term Euroyen loans to residents and non-residents liberalized
-Issuing of Euroyen bonds by foreign private corporations, state and local governments, and government agenciesauthorized
1985 Apr: -Medium-term and long-term Euroyen lending to non-residents liberalized-20% withholding tax payable by non-residents on Japanese Euroyen bonds abolished
1986 June:-Foreign banks allowed to issue Euroyen bonds
- US continuouslypressured Japan torelax its exchangecontrol in the early1980s
- This led to theliberalisation ofJapan’s financialsystem andencouraged Euroyenmarket development-60%
-30%
0%
30%
60%
90%
120%
150%
180%
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
US-JapanAccord in 1984
New foreign exchangelaw implemented in1998
Euroyen market growth
New foreign exchangelaw implemented in1980
Relaxation of outflows in 1977,Relaxation of inflows in 1979
Distortion due to theearly stage ofdevelopment
% growth
Source: BIS
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Reserve requirements and deposit insurance in Japan affected the efficiency of financial intermediation by less
- Low reserverequirements anddeposit insurancepremiums in Japan hadlittle discernable impacton the bid/ask spreadof domestic funding
- The benefits of goingoffshore were limited
- However, the Bank ofJapan implementedquantitative restraintsbefore 1991 whichempirically encouragedEuroyen growth
% growth
-60%
-30%
0%
30%
60%
90%
120%
150%
180%
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Euroyen market growth
Domestic reserve requirement
Too low to have effect on Euroyenmarket development
Abolition of window guidanceContinuous implementation of window guidance
Source: BIS
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RMB’s potential as an international currency and the associated costs and benefits
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No Chinese equivalent of “Bretton Woods” and RMB is not yet a commonly used unit of account
Unlike USD, RMB was never a major denominating currency and the unitof account to define exchange paritiesRMB became a trade denominating currency in July 2009 and developedrapidly from negligible to representing around 1.0% of world’s totalmerchandise trade in Q3 2011
*Cross-border trade settlement in RMB includes both merchandise and service tradeSource: People’s Bank of China (PBoC), China Customs, World Trade Organization
China's RMB cross-border trade settlement amount*
0.1 3.5 18.4 48.7126.5
341.3 360.3
597.3 583.4
0
100
200
300
400
500
600
700
Q32009
Q42009
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
RMB billion
Share of RMB cross-border trade settlement in Chinaand total world trade
0%
2%
4%
6%
8%
10%
12%
Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011
As % of Mainland'smerchandise trade
As % of world'smerchandise trade
9.2%
1.0%
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But there is a rising demand for another international currency after the financial crisis
The global financial crisis in 2007 exposed the weakness of advancedeconomies and eroded international confidence in USD and EUR
As reserve-rich countries, such as China and other Asian countries, sufferfrom the continuous depreciation of USD, there is rising demand foranother international currency
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However, China is still far from relaxing all exchange controls
The US had lax exchange controls in 1960s while Japan also relaxed itsexchange controls since early 1980s
China still adopts a foreign exchange management system similar to theone in Japan before 1980; cross-border fund flows are prohibited unlessallowed rather than allowed unless prohibited
China also requires pre-event regulation, examination and approval forcapital account transactions. Since RMB is not yet freely convertible,residents and non-residents are not free to own their desired amount offoreign currencies and RMB
Cross-border fund flows are still restricted, albeit being gradually relaxed
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RMB financial assets are not widely available to foreign investors
Thus, foreign investors are not able to invest widely in RMB assetsexcept:
QFIIs and RQFIIs are allowed to participate in the securities marketsin the Mainland in foreign currency and RMB respectivelyEligible institutions (including several foreign central banks) arepermitted to participate in the domestic interbank bond marketPBoC established bilateral currency swap agreements with 12economies amounted to over RMB 1.2 trillion
Hong Kong has developed the first RMB bond, equity and commodity(gold) market outside China
China’s financial markets are still developing
Financial market development in China still lags other economiesWithout a well developed financial market, relaxing exchange controls can beriskyDevelopment of RMB to the status of an international currency will be alengthy process due to high switching cost
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0
5,000
10,000
15,000
20,000
25,000
1970 1975 1980 1985 1990 1995 2000 2005 2010
USJapanUKChina
US$ billion
Source: Wilshire Associates (Wilshire 5000 is used for US in 1970-89), World Federation of Exchanges (US, Japan and UK figuressince 1990 and China figures since 2002), CEIC (Japan figures in 1970-89, UK figures in 1972-89), Shanghai and ShenzhenStock Exchanges (China figures in 1991-2001)
Stock market capitalisation
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China has the potential, given its rising international status
- The economicpower of China hasbeen increasingrapidly over thepast few years
- Continuous rapidgrowth will furtherstrengthen itseconomic power inthe world
Share of World’s GDP
Source: World Bank
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Japan
US
China
36
Origin from:
US Japan France Germany UK
China Japan China US China US Japan China US Japan China US Japan
1980 36 2 8 1 36 4 13 35 4 8 36 1 10
1990 8 2 4 1 16 4 8 14 6 7 28 2 5
2000 4 2 2 1 9 3 8 10 2 6 13 1 5
2010 1 4 1 2 2 6 11 1 4 14 3 2 13
Ranking of import trade
Ranking of export tradeDestination
to:US Japan France Germany UK
China Japan China US China US Japan China US Japan China US Japan
1980 17 2 5 1 52 7 19 33 6 17 42 2 18
1990 18 2 13 1 20 6 9 27 6 11 32 2 10
2000 11 3 4 1 14 5 9 16 2 12 24 1 10
2010 3 4 1 2 9 6 13 7 2 18 9 1 14
China’s strengthening ties with other major economies
In 2010, China already ranked top three by import origin in majoreconomies (even higher than the US), while its position as the top exportdestination also rose rapidly
Source: Organisation for Economic Co-operation and Development (OECD), China Customs
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China’s strengthening ties with other major economies (Cont.)
US Japan France Germany UK
To: China Japan China US China US Japan China US Japan China US Japan
1990 34 9 19 1 N.A. 1 30 41* 1 14 31* 16 8
2000 18 9 5 2 21 2 9 17 1 7 15 2 8
2009 8^ 12 4 2 17 10 35 7 12 12^ 26 2 14
*Data for 1989, ^Data for 2008
US Japan France Germany UK
From: China Japan China US China US Japan China US Japan China US Japan
1990 24 1 N.A. 2 46 2 3 19* 11 3 21* 1 2
2000 N.A. 8 24 2 31 3 22 25 7 14 28 2 4
2009 28^ 11 23^ 3 31 3^ 9 21 6 7^ 18 2 10^
Ranking of outward direct investment (ODI) flows (from major economies to China)
Ranking of inward direct investment (IDI) flows (to major economies from China)
China is already ranked as a major ODI destinations (in terms of flows) inthe world, though it is not yet an important source of IDI flows to the restof the world amid exchange control
Source: OECD, Ministry of Commerce, People’s Republic of China
Costs of currency internationalisationBroadening the scope for residents and non-residents to buy and sellRMB instruments might limit the ability to influence domestic interestrates and money supply (unless foreign holdings are relatively small)
Currency internationalisation requires capital account liberalisationwhich may entail certain risks:
RMB may face sharp depreciation pressure if foreign holders sell theirdomestic currency instruments in large amounts. It might become a risk ifChina has a large foreign currency debtIncreased issuance of foreign debt in China or Chinese corporate debt inforeign markets, may make China more vulnerable to external financialshocks
The associated risks of capital account liberalisation will require prudentmanagement as well as the facilitation of a productive real sector and anefficient financial sector
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Granger causality of onshore and offshoreinterest rate and liquidity measures
In order to test the interaction between onshore and offshore activities,Granger causality tests under a vector error correction model havebeen carried out between onshore and offshore interest rates andliquidity measures for the US and Japan, while exchange rates couldnot be tested since there is only one available rate:
⎩⎨⎧
+++=+++=
−−
−−
tttt
tttt
ECTycECTxcy
21212
11111
x εβεβ
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y refers to the first difference of offshore interest rates or liquidity measures, x refers to the first difference of onshoreinterest rates or liquidity measures and ECT is the error correction term
This is also referred to as the VEC Granger causality/block exogeneity Wald test
Granger causality of onshore and offshoreinterest rate and liquidity measures
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No Granger causality between onshore and offshore liquidity measureswere found for JPY; In addition, only weekly JPY interest rates wereavailable with which meaningful results were unobtainable
- Empirical evidencesuggest that USonshore interest ratesGranger caused USoffshore interest ratesbetween January 1982and June 2007inclusive, while noGranger causality wasfound betweenonshore and offshoreUSD liquiditymeasures
Onshore and offshore USD interest rates
0
5
10
15
20
25
30
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Offshore USDinterest rates(blue line)
Onshore USD interest rates (red line)
Percent per annum
Break in 1981
Break in 2007Break in 1990
Two-way Granger causality Onshore Granger causes offshoreJun 1973 - Dec 1980 Jan 1982 - Jun 2007 Jan 2009 -
June 2011
No Grangercausality
Onshore Granger causes offshore
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Benefits of currency internationalisation
Seigniorage, deriving from the issuing of non-interest bearing claims
Internationalisation of a currency will expose the onshore financial sectorto competition from the offshore financial sector which will enhance theonshore market’s efficiency
Lower exchange rate risk in conducting international trade or lower therisk of currency mismatch in financing activities
Availability of a wider funding source in RMB from overseas investors
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RMB business in Hong Kong
Scope of business in Hong Kong
2004 2007 2009 2010 2011
Retail
Financing
Trade settlement
Wealth management
Investment
• Personal RMB business
• RMB bonds • RMB trade settlement pilot scheme
• Changed Clearing Arrangement• Expanded trade pilot scheme • RMB wealth mgmt. products,
e.g. investment funds• Access to onshore bond market • Case approval of RMB FDI
• Inward and outward FDI in RMB
• Expanded trade settlement• RQFII • RMB bonds expanded to
Mainland corporations
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Rapid growth in deposit size
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- RMB depositbegan in Feb 2004
- Grew rapidlyafter the launch ofRMB cross-bordersettlementbusiness in 2H2009
- RMB 618.5 bn inOct 2011, 10.1%of Hong Kongtotal deposits,0.8% of theMainlandSource: Hong Kong Monetary Authority (HKMA)
RMB deposits in Hong Kong
0
100
200
300
400
500
600
700
Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 20100%
2%
4%
6%
8%
10%
12%
As a percentage oftotal deposits inHong Kong (RHS)
(solid line)
RMB billion
Outstanding amount ofRMB deposits inHong Kong(LHS) (bars)
Personal RMB business (Feb 2004)
Expansion of RMB business (Oct 2005)
Mainland financial institutions toissue RMB bonds (Jan 2007)
PBOC and HKMAsigned currency swapagreement (Jan 2009)
Pilot scheme of cross-bordertrade settlement (July 2009)
Expanded tradesettlement(June 2010)
Revised clearingarrangement (July2010)
Pilot scheme to invest in Mainland'sinterbank bond market (Aug 2010)
List of eligible firms under trade settlementscheme expanded (Dec 2010)
Pilot scheme for ODI in RMB (Jan 2011)
Further expansion of RMB trade settlement scheme, RQFII, RMB FDIby Hong Kong enterprises, RMB bonds issuance by Mainland'scorporation (Aug 2011)
Bond market still at early stage of development
- First RMB bondissued in July 2007and grewsignificantly
- RMB 137.8 bn inNov 2011,equivalent to 0.7%of China’s bondmarket
- Equivalent to 9.4%of HKD bondmarket at end June2011
45
Source: HKMA
Outstanding amount of RMB bonds in Hong Kong
0
20
40
60
80
100
120
140
160
Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 20110.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
% of outstanding bondsin China (RHS)(solid line)
RMB billion
Outstanding amount ofRMB bonds in HongKong (LHS) (bars)
First RMB bond (by Mainland's financialinstitution) in July 2007 (China DevelopmentBank)
First issuance by foreign bankin July 2009 (HSBC (China))
First China sovereign bondin Oct 2009
More Chinese sovereignbond in Dec 2010 andAug 2011
First issuance by foreigncorporation in July 2010(Hopewell HighwayInfrastucture)
First issuance by Mainland'scorporation in Nov 2011
Cross-border settlement drives market growth
- Growth driver forRMB deposits in HongKong
- 8.6% of China’s totaltrade in Oct 2011
- Hong Kong’s shareamounted to 90% inQ3 2011
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Source: HKMA
RMB cross-border settlement in Hong Kong
0
40
80
120
160
200
240
Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 20110%
2%
4%
6%
8%
10%
12%RMB billion
RMB cross-bordersettlement amount inHong Kong (LHS) (bars)
% of China's total trade(RHS) (solid line)
Program started in July 2009 formerchandise trade between 4 Guangdongcities plus Shanghai and Hong Kong, Macauand ASEAN countries
Program expanded in June 2010 to cover bothmerchandise and service trade and 20 provincesand cities with the world. The list of eligible firmswere expanded in Dec 2010
Program further expanded in August 2011 to coverthe entire country with the world
CNH and CNY exist in two separate spot markets
- Two separate spotmarkets without freefund flows
- CNH normally tradesat a premium to CNY,but obvious deviationsalso occur duringtimes of financialvolatility
- Empirical evidencesuggest that the tworates do not have aGranger causalityrelationship
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CNH and CNY spot rates
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
Aug2010
Sep2010
Oct2010
Nov2010
Dec2010
Jan2011
Feb2011
Mar2011
Apr2011
May2011
Jun2011
Jul2011
Aug2011
Sep2011
Oct2011
Nov2011
CNH (blue)
CNY (red)
RMB per USD
Pilot scheme to invest in Mainland'sinterbank bond market (Aug 2010)
HKMA issued guideline on net open position forAIs. List of eligible firms under cross-border tradesettlement scheme expanded (Dec 2010)
Pilot scheme for ODI settlement inRMB (Jan 2011)
Further expansion of RMB trade settlementscheme, RQFII, RMB FDI by Hong Kongenterprises, expansion of RMB bondsissuance by Mainland entities (Aug 2011)
No correlation between interest rates
- Similarly, SHIBORand CNH HIBORare two separatemarkets
- Divergentrelationship aftermonetary tighteningsince mid 2010
- CNH HIBORtrading remains thinbut is reportedly onthe rise
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Source: Bloomberg, National Interbank Funding Center Shanghai
3-month SHIBOR and CNH HIBOR
0%
1%
2%
3%
4%
5%
6%
7%
Mar 2010 Jun 2010 Sep 2010 Nov 2010 Feb 2011 May 2011 Jul 2011 Oct 2011
SHIBOR
CNH HIBOR
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Given RMB’s international position, what other factors drive Hong Kong to be an offshore RMB centre?
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Why Hong Kong?Tokyo London New
YorkSingapore Hong
Kong
Efficient and reliable financial infrastructure
Sound legal system
Free flow of capital and information
Strong pool of talent
International business customs and practices
Simple tax regime and low tax base
Long history of Mainland enterprises presence
Largest IDI and ODI investor of China
First mover advantage with RMB financial infrastructure
One country-two system with strong collaboration between our financial regulators, ensuring stronger financial security in China
Hong Kong is the most ready and experienced financial centre serving ChinaHong Kong is able to develop as an offshore RMB centre with the support ofMainland authorities
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Since China still has exchange controls, Hong Kong needs Mainland’s support to develop RMB business
Only Hong Kong and Macau have RMB clearing banks linked to PBoCRMB clearing bank and participating banks are allowed to participate in China’sinterbank bond market (subject to approval)China has committed to issue government bonds in Hong Kong on a regularbasis and allow its financial institutions and corporations (subject to quota) toissue RMB bonds in Hong Kong
RMB in Hong Kong, to a certain extent, is not subject to exchange control ordomestic regulations (such as interest rate set by PBoC)
China’s regulatory rules, business practices, financial infrastructure andinformation dissemination systems are different from international norms.Foreign investors are more inclined to carry out business offshore
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Hong Kong can bring a unique combination of potential benefits to the Mainland
Mainland financial institutions are poised to benefit from the developmentof Hong Kong’s RMB business with their strong Hong Kong presence andMainland networks
The liberalisation of China’s exchange controls can proceed at its own pacewhile any demand for sophisticated financial products of Mainlandenterprises can be satisfied in Hong Kong
RMB financial markets operating under international business practicescould be developed in Hong Kong ahead of Mainland’s liberalisation.China could manage its pace of development and reforms (through RMBre-circulation)
Foreign companies can issue RMB bonds in Hong Kong and insulate thedomestic market from the default risk of those companies
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Conclusion
The status of USD benefited from Bretton Woods, US’s lax exchangecontrol system and US’s large and deep financial markets, in turn allowingthe Eurodollar market to develop disproportionately larger than US’seconomic size
Political and regulatory factors (liberalisation of exchange control anddomestic credit controls) may have encouraged fund flow to the offshoremarket and encouraged its development
RMB is not yet an international currency, but has the potential, givenChina’s economic size and strengthening ties with the world
However, the lack of a Bretton Woods equivalent and deep financialmarkets while having exchange controls will hinder the RMB’s rise
Internationalisation of RMB has benefits as well as costs which needs to bemanaged prudently by the Mainland authorities
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Conclusion (Cont.)
Over the past few years, Hong Kong has already developed a sizeable RMBmarket, efficient financial infrastructure and accumulated valuableexperience
RMB re-circulation has been strictly controlled by China out of financialsecurity concerns, but has been gradually relaxed
Hong Kong may not be the only financial centre capable of developinginto an offshore RMB centre, but it is the most ready and experiencedfinancial centre serving China
Last but not the least, Hong Kong is a Special Administrative Region ofChina. Regulators can collaborate effectively at different stages of RMBinternationalisation and exchange control liberalisation, better ensuring thefinancial security of China
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Thank you