24 October 2016
Hong Kong must consolidate its strengths as a prime offshore renminbi center as the Chinese currency goes global. Photo: CNSA
Hong Kong must consolidate its strengths as a prime offshore renminbi center as the Chinese currency goes global. Photo: CNSA

Hong Kong faces opportunities as well as challenges on RMB front

The IMF recently welcomed the renminbi into its Special Drawing Rights (SDR) currency basket. It’s a big event for the global financial history. Beijing, meanwhile, has hailed the move, saying that it will be a win-win for China and the world and that it will spur further market reforms in the nation.

Although China has a huge amount of foreign reserves and low level of foreign debt, capital outflow may continue from the country as the US has begun to raise its interest rates.

Facing a slowing economy, China needs a relatively independent monetary policy and a more flexible RMB exchange rate system.

Hong Kong, as the biggest and most active RMB offshore center, can play an important role as mainland authorities step up currency-related initiatives.

The central government has established pilot free-trade zones in Guangdong, Tianjin and Fujian. The first one is aimed at enhancing Guangdong’s economic ties with Hong Kong and Macau, while the Tianjin zone will promote financial leasing industry and the Fujian facility will support cooperation between mainland and Taiwanese firms.

New measures will be launched to expand RMB usage across the border, and also promote capital account convertibility and cross-border financing and investment.

All the initiatives will offer lot of opportunities for Hong Kong’s financial industry and the trade sector. The city shouldn’t let go of the chance.

As the second largest economy in the world, China is a key engine for global growth.

Hong Kong should make full use of the opportunities that will arise from the RMB’s inclusion in the IMF’s reserve currency basket.

The government should take a proactive approach and come up aggressive policies to facilitate the establishment of more diversified and innovative RMB products.

With good offshore RMB liquidity, Hong Kong can launch more products such as commodity futures denominated in the Chinese currency.

The city can also accelerate initiatives aimed at linking up overseas investors with the mainland market. In addition, China’s “One Belt, One Road” program will also open up huge opportunities.

Norman Chan Tak-lam, the head of the Hong Kong Monetary Authority, has said that the Exchange Fund will consider adding more RMB exposure.

According to the IMF, central banks held SDR reserves worth about US$254 billion in 2014. As the RMB will account for 10.92 percent in the SDR basket, renminbi reserves in central banks should be about US$27.74 billion, based on the overall figure last year. 

Some observers have said that the IMF’s decision is more of a symbolic move and that the RMB exchange rate will not be supported. Only time will tell if the prediction turns out correct.

What is, however, not in doubt is the fact that the SDR inclusion marks an important milestone for the RMB’s internationalization path.

For Hong Kong, challenges will come with opportunities. As with all other international currencies, the RMB will experience more turbulence in the future. Hong Kong should be prepared.

This article appeared in the Hong Kong Economic Journal on Dec. 22.

Translation by Myssie You

[Chinese version中文版]

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Permanent Honorary Chairman of Hong Kong Federation of Fujian Associations

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