Hong Kong as a Trading Post for the Renminbi
Tony Latter (Visiting Professor, University of Hong Kong)
(This article originally appeared in the August 25, 2003 issue of South China Morning Post in Hong Kong and is reproduced here with permission from the publisher)
When the world is eventually presented with a fully convertible renminbi - as it surely will be, although it is a bold person who predicts the timing - where is most financial business in the currency likely to be located?
The intuitive answer is on home ground - the mainland. It is hard to believe that this would not be the preference of the authorities there. At the very least, they will want to avoid mimicking the US and Japan where, years back, inept domestic regulations provided positive incentives for lucrative parts of the dollar and yen markets to migrate offshore.
So, what can we make of the recent announcement that the central government has agreed to give preference to Hong Kong in the context of offshore renminbi business and to "consider allowing" banks to run certain types of local renminbi business in Hong Kong? Note, incidentally, despite the somewhat condescending phraseology, that our banks function under Hong Kong law and so are already free to operate in renminbi; the key permission that is needed relates to recycling renminbi back into the mainland banking system, without which it would scarcely be worthwhile for our banks to broaden renminbi business here.
What is in it for the mainland? While it is understandable that officials in Beijing would show a preference for Hong Kong over other offshore locations, it is unclear why they should want to help any development of such business. Within the framework of the mainland's capital restrictions, businesses, whether here or across the border, appear able to manage their renminbi finances perfectly well, essentially via the onshore market. Meanwhile, at the retail level, in Hong Kong we have an efficient offshore yuan banknote market which meets the needs of travellers going to and fro, and where market forces keep the exchange rate close to the official rate. Neither businesses nor individuals are audibly clamouring for more offshore facilities.
One would expect the mainland authorities to be cautious, given that extending the offshore market would almost certainly add to the available means of, or incentives for, circumventing capital controls.
One argument has been that this offshore liberalisation would be a sensible first step on the learning curve towards full convertibility, but a disinterested adviser might say the mainland should conduct such experiments at home.
It is hardly surprising then, that despite the idea having been around for some time, the announcement has been couched only in very general terms. Nevertheless, an official statement is an important sign of commitment, even if there are doubts about the speed with which it can be turned into substance.
If there does not seem to be much benefit for the mainland, is there some for Hong Kong? Yes; potentially a lot.
Hong Kong's ability to serve as a major renminbi trading centre once there is full convertibility will depend upon expertise, efficiency and critical mass. All of these will be helped if we can get our foot in the door at an early stage. For instance, bank customers could be wooed to open renminbi accounts, and hopefully to stay loyal in the longer term. Banks themselves, if allowed, could gain familiarity with the onshore interbank market for managing liquidity - although one suspects that initially anyway, the mainland authorities might want such flows to be channelled through a single bank, rather than allowing competitive access. And our existing foreign-currency payment systems for the US dollar and euro could be replicated for the yuan, although this could fall by the wayside after full convertibility, as there might no longer be a case for a separate system.
The initiative offers a prized opportunity for Hong Kong to claim a share of the convertible renminbi business. Even so, the scale of the challenge should not be underestimated. Mainland cities will retain the home advantage.
Enabling the renminbi to develop here would also ease the passage for any eventual closer liaison between the currency and the Hong Kong dollar.
The frailty of the mainland's domestic banks is widely regarded as one reason, possibly the main one, why the renminbi remains unconvertible. The concern may not only be that convertibility might tempt the banks into undesirable, risky new business, but also that, until they have had time to mend their reputations, they would not be able to compete effectively with foreign banks, which, aided by improved access under the World Trade Organisation, would make huge inroads. By the same token, the mainland authorities may not welcome a burgeoning offshore market in Hong Kong, unless their own banks can secure a strong market share. Our negotiators may have to press hard for a level playing field.
All in all, the recent announcement is already a considerable achievement for Hong Kong, but that may have been the relatively easy part. Let us hope that something of substance now emerges, but we should, perhaps, not pin our hopes too high.