Hong Kong, Shanghai Explore Financial Synergies
Tuesday, May 24, 2011

During his speech in a session on ‘New Opportunities for Shanghai in Becoming a Global Financial Centre" at the Lujiazui Forum in Shanghai, Hong Kong’s Secretary for Financial Services and the Treasury, Professor K C Chan, looked at the new opportunities for both financial centres arising from the prospect of renminbi (RMB) internationalization.

Chan said that the internationalization of the RMB is part of the new financial order for Asia and that “Shanghai's financial market will become more and more open, as a natural part of the process of the internationalization of the RMB. The pace of the development of Shanghai as an international financial centre will be linked to the pace of the internationalization of the RMB.”

Until now, he added, with capital controls still in place, China has encouraged the use of the RMB as an international currency by allowing the RMB to flow from the Mainland to an offshore market for trade settlement purposes, and for that offshore market to anchor and further develop RMB liquidity there. In that way, due to its unique position under the ‘one country, two systems’ arrangement, Hong Kong has developed into the most compelling offshore RMB market.

Nevertheless, Chan recognized that, “RMB internationalization could not succeed without the support of Shanghai, which has the largest pool of onshore liquidity and is the recognized onshore RMB business centre.”

He pointed out, however, that “the question that comes after RMB internationalization - the one question that is of importance to Shanghai's further development - is when financial portfolio flows will be liberated between the Mainland market and the rest of the world”.

“In light of the experience gained in RMB internationalization., the opening up of the capital account in this manner can be done in a gradual and orderly manner,” Chan continued. He considered, for example, that there could also be additional channels for portfolio investment into the Mainland, which could offer liquidity as well as international valuation for initial public offerings, while there could also be the cross-listing of exchange traded products, such as exchange traded funds and futures market products.

Such developments would also, in turn support the further growth of the offshore RMB market, “allowing more investment products to be offered to satisfy the demand of offshore investors”, he said.

With Shanghai as the biggest onshore financial centre and Hong Kong the biggest offshore financial centre of China, Hong Kong’s government believes that “there will be increasing interaction between the onshore and offshore pools of funds through intermediation between the two centres”.

In his speech, Chan concluded that “we would both become bigger centres serving national development. In the process, Shanghai markets will be fully internationalized and pricing will be integrated with that of the rest of the world. Last year, I described the relationship between Shanghai and Hong Kong as a set of twin engines propelling the progress of RMB internationalization forward. In the process of the internationalization of China’s capital market, we will work even more closely.”

As a first demonstration of this process, Chan, together with the Director of the Shanghai Municipal Government Financial Services Office, Fang Xinghai, and representatives from the Hong Kong Monetary Authority and the Shanghai Head Office of the People's Bank of China, has undertaken a joint roadshow to Indonesia and Malaysia. “This,” he said, “is just one of many examples of the co-operation that is going on between Hong Kong and Shanghai to jointly serve our country's development needs.”