Hong Kong striving for RMB offshore business center

HONG KONG - The Hong Kong Special Administrative Region is now taking shape as a premier offshore renminbi business center and serves as an important platform for the development of renminbi business around the globe, according to Donald Tsang, chief executive of the HKSAR.

This month, China's Ministry of Finance will issue 23 billion yuan-denominated sovereign bonds ($3.64 billion) in Hong Kong, setting aside 2 billion yuan bonds specifically for central banks and monetary authorities outside the Chinese mainland.

China's Ministry of Finance announced the issuance in Hong Kong Thursday morning in an effort to support the city's economic development.

The issuance is the fourth and largest of its kind, following the sale of 6 billion yuan in yuan-denominated treasury bonds in 2009, 8 billion yuan in 2010 and 20 billion yuan in 2011.

Among the total, 15.5 billion yuan worth of bonds, including 7 billion yuan of three-year bonds, 5.5 billion yuan of five-year bonds, 1 billion yuan of seven-year bonds, 1 billion yuan of 10-year bonds and 1 billion yuan of 15-year bonds, will be sold to institutional investors via the bond-tendering platform of Hong Kong Monetary Authority's Central Moneymarkets Unit.

Another 5.5 billion yuan worth of bonds will be offered to individual investors through retail counters. Besides, 2 billion yuan worth of bonds will be sold to foreign central banks and monetary authorities through placement, with the coupon rate the same as the successful tenders decided by CMU with the same maturities.

According to a memorandum of cooperation signed by MOF and Hong Kong Exchanges and Clearing Limited, yuan-denominated sovereign bonds can get listed in HKEx.

"The issuance of yuan-denominated sovereign bonds in Hong Kong for the fourth time demonstrates clearly the central government's support for Hong Kong's development as an offshore renminbi business center," said the city's Secretary for Financial Services and the Treasury K. C. Chan.

Chan said that it is the first time arrangement was made for the special placement of the renminbi sovereign bonds to foreign central banks, "which serves as a showcase for issuing bonds to overseas investors in the future."

Norman Chan, chief executive of the HKMA, said such phenomenal growth was partly a result of the continued maturity of offshore renminbi businesses in Hong Kong, and partly because of the expansion of the policy framework by the mainland authorities to facilitate better use and circulation of renminbi funds between offshore and onshore markets.

Hong Kong was the first offshore market to launch renminbi business back in 2004. With proven experience, a comprehensive range of offshore renminbi products and services has been developed to meet business needs of both local and overseas companies and financial institutions.

According to the HKMA, trade settlement in renminbi handled by banks in Hong Kong amounted to 1,915 billion yuan in 2011, more than five times the amount settled in 2010.

Hong Kong now possesses the largest offshore renminbi liquidity pool, with offshore renminbi deposits growing from 310 billion yuan at the end of 2010 to 589 billion yuan at the end of 2011.

With increasing demand for renminbi financing, issuance of offshore yuan-denominated bonds in Hong Kong (dim-sum bonds) reached 108 billion yuan in 2011, three times the total of 2010 with a broader range of issuers.

Charles Li, chief executive of HKEx, said that to the mainland, the process of renminbi internationalization is similar to raising a child with Hong Kong as the "nursery."

In the process, renminbi will experience birth pains before eventually becoming an international currency for trade settlement, pricing, investment and reserves, he said.

But as the pioneer in offshore renminbi business, Hong Kong is also facing challenges such as renminbi deposits contraction.

Yuan deposits in Hong Kong have dropped for five straight months, to 552.4 billion yuan at the end of April from the peak of 627.3 billion yuan in November last year, according to the latest data from the HKMA.

Standard Chartered pointed out that the decline has been due to a combination of several factors, such as more balanced onshore yuan-denominated import/export trade flows, reduced yuan appreciation expectations, expanding channels for renminbi outflows via dim-sum issuance, offshore renminbi foreign direct investment and RQFII scheme and possible migration of liquidity to London and other cities.

Therefore, the contraction of the savings pool may be a sign of enhanced two-way flows and does not necessarily paint a gloomy picture for the offshore renminbi market in Hong Kong.

Peter Pang, deputy chief executive of the HKMA, said that more foreign banks are either choosing to have a base in Hong Kong or are using renminbi correspondent banking services provided by banks in Hong Kong.

As at the end of May, there were 196 banks participating in Hong Kong's renminbi clearing platform. Of these, 170 are foreign-owned or located overseas.

At the same time, more than 1,100 renminbi correspondent accounts were maintained by overseas banks with banks in Hong Kong. The amount due to and due from such overseas banks amounted to 128 billion yuan and 146 billion yuan respectively.

"Hong Kong will remain the leading offshore renminbi market and will be complemented rather than rivaled by London as the offshore market develops," said Anita Fung, HSBC's chief executive for Hong Kong.

As London and other financial capitals are pushing their credentials as offshore renminbi trading centers, there is a concern that leveraging its time-zone advantage, London could pose a threat to Hong Kong in offshore renminbi business.

However, HSBC firmly believes that London will play a complementary rather than competitive role alongside Hong Kong in this regard.