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Hong Kong: A Leading Financial Hub of Offshore RMB

Date: 
8 Apr 2020

Hong Kong has seen more than its fair share of uncertainty in the last few months. The protracted trade negotiation between the United States and China and the months of social events, as well as the latest pandemic caused by the COVID-19 virus have affected the city's economy. Despite these turbulences, Hong Kong has maintained its institutional strengths as a provider of financial services, including its role as a leading offshore renminbi (RMB) financial hub. At the FSDC, we believe that when short-term disruptions wane, there is still a lot to look forward to in 2020 and that our city will continue to remain an attractive option for those who want to trade and invest in RMB.

For a long time, Hong Kong has been a gateway to and from Mainland China, and different data points show that our city originates and intermediates about two thirds of China's inward foreign direct investment and outward direct investments. As one of the Mainland's principal trading partners, Hong Kong not only provides a channel for goods and services to go global, but also catalyses the international usage of RMB along the process. Since the launch of the pilot scheme for cross-border trade settlement in renminbi in 2009, RMB trade settlement handled by banks in Hong Kong saw exponential growth, recording 5.38 trillion1 in year 2019, and accounting for 89% of total RMB cross-border trade settlement2.

Much of the two-way financial investment flows, too, have been going through Hong Kong. Since the launch of the Shanghai-Hong Kong Stock Connect in 2014 and the Shenzhen-Hong Kong Stock Connect in 2016, northbound trade of both stock connect markets has accumulated a total transaction value of over RMB21 trillion as of end-March, 2020.3 By facilitating cross-boundary investment flows, developments such as these have further consolidated the SAR's position as the financial gateway to and from Mainland China.

During this journey, Hong Kong has taken up a crucial role in offshore RMB settlement, handling much of the world's offshore RMB payment, remittance and settlement transactions which have displayed a momentum of growth. For instance, the RMB Real Time Gross Settlement system recorded an average daily turnover of RMB1,100 billion in 2019, 55% higher than in 2014.4 At the same time, Hong Kong continues to strengthen its role in offshore RMB settlement. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), this amounts to about 75% of RMB activity outside Mainland China.5

Our ability to cover these services efficiently is attributable to our deep RMB liquidity pool. As of the end of 2019, Hong Kong's RMB capital pool, including customer deposits and certificates of deposits, stood at RMB658 billion.6 Relatedly, according to the People’s Bank of China, Hong Kong is the world's largest RMB deposit pool and accounts for nearly half of all offshore RMB deposits.7

Due in part to this enormous RMB liquidity pool, Hong Kong is also the world's largest offshore RMB foreign exchange and interest-rates derivatives market. According to the Bank for International Settlements' (BIS) Triennial Survey of Foreign Exchange and Derivatives Market Turnover, as of April 2019, the average daily turnover of RMB foreign exchange transactions reached USD107.6 billion, representing a monumental upswing of 39.6% compared with what the previous survey recorded in 2016; and the average daily turnover of RMB over-the-counter interest-rate derivatives almost doubled to USD12.7 billion.8 Another report from the BIS also showed that, when it comes to offshore RMB foreign exchange transactions, 41% of them are traded in Hong Kong. This is notably higher than the share of trades conducted in the locations that ranked second and third, which are London (22%) and Singapore (16%), respectively.9

Another alluring aspect about Hong Kong's RMB market is the sheer variety of offshore RMB investment products available here, compared with other offshore RMB markets. In Hong Kong, investors have easy access to such products as RMB-denominated foreign exchange futures, RMB-denominated gold futures and RMB-denominated commodity futures, particularly in metals like aluminium, zinc, copper, nickel, tin and lead.10 Such unique advantages make Hong Kong a second-to-none leader in offering services to the offshore RMB liquidity.

Hong Kong has developed a trusted, stable ecosystem for RMB-related finance over the years. Looking forward, there is potential yet to be tapped in fields such as investment, risk management, payment, and liquidity management services in our RMB market. With these further endeavours and the integrated development of the Greater Bay Area, we can look forward to our city continuing in its role as the leading global offshore RMB financial hub.

 

Ding Chen
Board Member

Shusong Ba
Mainland Opportunities Committee Member

Christopher Hui
Executive Director

Financial Services Development Council

 

 


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