The further expansion and liberalisation of the Renminbi trade
settlement pilot scheme, together with the recent signing of the
revised Settlement Agreement on the Clearing of Renminbi Business
in Hong Kong are seen by most foreign investors as an important and
very positive step in China's internationalisation of its
currency. In particular, it is expected that these developments
will result in a significant increase of Renminbi reserves in Hong
Kong. This will stimulate the development of new
Renminbi-denominated investment options which will help Hong Kong
establish its position as an active Renminbi offshore centre.
However, the key issue which will affect the motivation of
foreign investors to accept the Renminbi as a clearing currency and
to invest in RMB products is whether and when such foreign-held
Renminbi will be allowed to be used freely in the capital markets
of China, given the Renminbi is not an internationally convertible
currency. Foreign investors will wish to be provided with more
channels through which they can make use of this currency.
Regulatory obstacles are currently self-evident as the capital
market of China is, generally speaking, closed to foreign-held
The recent lifting of the restrictions on the opening and
transfer between Hong Kong authorised institutions of Renminbi
deposit accounts will promote the liquidity of Renminbi in Hong
Kong and also make Renminbi-related inter-bank business feasible.
It is reported that CITIC Bank International and the Industrial and
Commercial Bank of China have just completed the first swap of Hong
Kong dollars for Renminbi. It is unlikely to be very long before we
see various RMB-denominated financial products appearing on the
market, including insurance, securities, fund products and other
financial derivatives. HSBC has launched its new
Renminbi-denominated currency-linked structured deposits in Hong
Kong and BOCG Life has also launched several Renminbi-denominated
From a foreign investor's point of view, these
developments will provide more opportunities to receive revenue in
Renminbi and take advantage of its widely-predicted potential for
However, as mentioned above, it remains uncertain to what extent
and when China will open its capital markets to such foreign-kept
Renminbi deposits. Being an offshore Renminbi centre, Hong Kong may
provide some investment opportunities, but the development of such
Renminbi-related business will be limited if not ultimately
channelled/connected to the China market. Chinese authorities are
considering various options in this respect and the introduction of
a "mini-QFII" scheme (where certain qualified Renminbi
funds deposited in the Hong Kong market may be allowed to be
invested into the A share market of China) is now a hot topic. A
chief official of the Shanghai Financial Service Office has also
mentioned that Shanghai intends to channel the Renminbi funds
deposited with the banks in Shanghai to the inter-bank market of
China. We expect that China will open the "door"
gradually and very carefully in order to mitigate any possible
negative impact to China's economy.
Uncertainty always goes with risks. Whether or not and to what
extent foreign investors may participate in the process of
Renminbi's internationalisation depends on their confidence
in the economy of China and its global influence.
Recent news reports anticipate an increase in "intermediary
activities denominated in the Renminbi". We understand that
the "intermediary activities denominated in the Renminbi"
include financial products provided by banks, insurance products,
securities and fund products.
The industry that would enjoy immediate benefit from these
developments would be the banks in Hong Kong. Apart from usual
banking services, the banks may develop various
Renminbi-denominated financial products, which would have huge
market potential. Some banks have been quick to launch such new
Whether or not there will be widespread development of
Renminbi-denominated securities or fund products in Hong Kong will
depend on whether the "channels" for bringing the
Renminbi funds to China (for any purpose other than trade) will be
put in place. The "mini-QFII" scheme is currently under
discussion. However, it is probably sensible not to have high
expectations on its effects on the market, as the quota of the
permitted flow of funds into China under such scheme would
initially be very limited. The same issues will apply to the
development of related insurance business.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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