Hong Kong's dominant role to remain in RMB tradingBy Nathan Chow Hung Lai (周洪禮)
Given that RMB is fungible offshore, the emergence of new offshore centres simply expands the existing regime instead of creating competing systems. As such, we do not expect the recent development to have much impact on Hong Kong; especially when the market is already relatively mature after eight years of development. Being an important entrepot of the mainland, Hong Kong is currently handling more than 80% of all RMB payments and receiving over 50% of all letters of credit sent by banks in China (Chart 1).
Chart 1. Letters of Credit (Transaction Value)
China --> Hong Kong 53.8%
China --> Singapore 19.0%
China --> Rest of Asia 8.6%
China --> EMEA 3.2%
As a result, Hong Kong banks are taking the major share of RMB deposit flows from the mainland. The large RMB liquidity pool fuels the RMB-denominated financial products market. According to our newly-lunched DBS RMB Index for VVinning Enterprises (DRIVE), corporates' interest in RMB usage in growing and companies find RMB hedging products useful1.
Apart from geographical proximity, Hong Kong also enjoys political support from Beijing. China's 12th Five-Year Plan states clearly that Beijing is in full support of Hong Kong's development as an offshore RMB center, highlighting its prominence in the process of RMB internationalization.
Most importantly, Beijing wants to relax the currency controls without creating unforeseen negative consequences. Hong Kong, as a Special Administrative Region of China under the framework of one country two systems, serves this goal well.
Meanwhile, there had been deregulations to enhance the competitiveness in Hong Kong's RMB business over the past year. To provide greater flexibility for Hong Kong banks to manage their RMB exposure, banks' net open positions and statutory liquidity requirement have been liberalized several times last year. Since July 2012, banks in Hong Kong are allowed to offer RMB services to non-resident personal customers, and currency conversion is not subject to corresponding limits for Hong Kong residents. These put Hong Kong on a level playing field with other cities offering RMB services.
1. DBS RMB Index for VVinning Enterprises (DRIVE); http://hk.dbs.com/en/enterprise/rmb/