HK Renminbi Trade Settlement Working Smoothly
Monday, January 17, 2011

In response to a question in Hong Kong’s Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, confirmed that cross-border renminbi (RMB) trade settlements are operating in an orderly and smooth fashion.

He said that: “As cross-border trade settlement in RMB expands and deepens, RMB payments from the Mainland to Hong Kong will continue to increase and funds so accumulated will become the major source of supply in the local RMB market. For the first 11 months in 2010, cross-border trade payment from the Mainland to Hong Kong amounted to RMB180bn (USD27.15bn) while payments from Hong Kong to the Mainland amounted to RMB50bn. In other words, the net inflow into Hong Kong was about RMB 130bn.”

“This,” he added, “was much larger than the amount of RMB10bn funds purchased in Shanghai through the Clearing Bank in the China Foreign Exchange Trading System by participating banks during the same period. Under such circumstances, RMB deposits in Hong Kong increased steadily to about RMB280bn at end-November last year. Hence, the pool of offshore RMB funds in Hong Kong has reached a level that is adequate to meet the demand from local firms, and the conversion window in Shanghai is a supplementary rather than the main source of conversion for RMB trade settlement.”

However, the Hong Kong Monetary Authority (HKMA) has also discussed with the People's Bank of China (PBoC) and considered refinements to the arrangements for the conversion of RMB in relation to cross-border trade settlement. To maintain a steady supply of RMB, the HKMA clarified the arrangement for the conversion of RMB conducted by participating banks through the Clearing Bank in Shanghai, and, at the same time, RMB20bn will be provided by the HKMA as a standing arrangement for cross-border trade settlements through its currency swap arrangement with the PBoC.

Chan also pointed out that: “There was good development of offshore RMB business in Hong Kong in 2010. The amount of RMB bonds issued in 2010 exceeded RMB30bn, with issuers including local and multinational firms as well as international financial institutions such as the Asian Development Bank. Meanwhile, banks and financial institutions in Hong Kong also launched a wide range of RMB denominated financial products.”

He emphasized that the Linked Exchange Rate System (LERS) between the Hong Kong dollar and the US dollar has served Hong Kong well since its establishment in 1983. “It is the pillar of Hong Kong's monetary and financial stability,” he stated. “The Hong Kong Special Administrative Region Government has no intention to change it.”

“There is,” Chan continued, “no evidence that the LERS is driving up inflation in Hong Kong. In fact, in terms of inflation, Hong Kong compares well with other Asian economies that operate more flexible exchange rate and interest rate regimes.”

He concluded that, in the meantime: “We do not agree to the suggestion of linking Hong Kong dollar to RMB now. The Hong Kong dollar can be linked to RMB only when certain important, fundamental conditions are met, including that RMB must be freely convertible, the capital account control must be removed by Mainland China, the financial and asset markets in Mainland China should be wide, deep and liquid enough, etc. These fundamental conditions have not yet been fulfilled at the moment.”

The HKMA has also welcomed the People's Bank of China's announcement on January 13 of a pilot scheme for the settlement of overseas direct investments in renminbi.

Mainland enterprises will be able to conduct direct investment overseas using renminbi. Hong Kong branches and correspondent banks of Mainland banks can also obtain renminbi funds from the Mainland and extend renminbi lending to the enterprises conducting the investments.

Monetary Authority Chief Executive Norman Chan said the scheme will further enhance the circulation of renminbi funds for trade and investment activities.

Hong Kong has long been the prominent platform for the Mainland's outward direct investments. In 2008 and 2009, the Mainland's outward direct investments amounted to USD55.9bn and USD56.5bn, of which 69% and 63% was invested in Hong Kong or through Hong Kong to other parts of the world.

Upon implementation of the pilot scheme, Mainland enterprises can conduct such investments through Hong Kong's offshore renminbi centre, and at the same time make use of the multi-currency and multi-functional financial platform in Hong Kong for related financing and fund management activities.