September 27, 2011

Chief Secretary Henry Tang

Hong Kong's financial sector has a long and exciting journey ahead in scaling the heights offered by renminbi business.
 
Allow me to take you back just as recently as two years ago to the first Annual Banking Conference. At end-2009 renminbi bank deposits stood at just over RMB60 billion. Today these deposits exceed RMB570 billion. In 2009, the Central Government in Beijing had just launched a Pilot Renminbi Trade Settlement Scheme. Back then Hong Kong and a few other places could settle their Mainland trade in renminbi with a handful of cities and regions across the boundary. Today, companies around the world can settle their Mainland trade in renminbi throughout China. Also, in 2009 we saw six renminbi bond issuances in Hong Kong with a total issue value of RMB16 billion. In the first half of this year alone, there were 38 bond issuances with a total value of almost RMB43 billion.
 
These are a few indications of how our renminbi business has evolved in a relatively short period of time. We are doing well so far. But, given its huge potential and the Mainland's robust economic growth, we are certainly not at the summit yet.
 
To use a mountaineering analogy again, we have established three major base camps to support the next phase of our ascent. These base camps are renminbi banking, trade settlement and capital raising. They are mutually supporting and provide a firm platform from which to continue our journey.
 
Most climbers will tell you that the keys to success are experience, teamwork, planning and vision. These are also important to Hong Kong's renminbi aspirations. 
 
Renminbi aspirations
As an international financial centre Hong Kong has played an important role in the Mainland's spectacular growth story over the past two decades. At the same time, the rapidly expanding economic and financial activities of the Mainland have provided enormous business opportunities for our financial and professional industries. 
 
Indeed, Hong Kong has been a stable financial platform supporting the Mainland's policies for reform and opening up over three decades. Local manufacturers and bankers were the first to provide capital, expertise and management required for the Mainland's development. 
 
Hong Kong accounts for over 50% of the foreign direct investment into the Mainland. Hong Kong's stock market is also an important fund-raising channel for Mainland companies. Between 1993 and 2010, these firms raised a total of around US$380 billion.
 
All these activities have added to Hong Kong's experience as a testing ground for the Mainland's financial liberalisation. As China's economic reform progresses and diversifies, our renminbi dimension will be an important area of future development.
 
Second, teamwork. Hong Kong and the Mainland will continue to work together in expanding the scope of offshore renminbi business. We have the full support of the Central Government in this process. The National 12th Five-Year Plan clearly supports Hong Kong's development as an offshore centre for renminbi business. The plan also reinforces the Mainland's commitment to maintaining Hong Kong's stability and prosperity under the principle of One Country, Two Systems.
 
This is important because One Country, Two Systems guarantees our city's unique advantages as a global financial centre. This includes the rule of law, fully convertible currency and free flow of information, ideas and talent.
 
At the same time, Hong Kong is in step with the Mainland's work in liberalising its currency. This includes promoting greater use of renminbi for cross-border transactions. We expect an increasing proportion of the Mainland's external trade and investment to be conducted using renminbi rather than a third currency.
 
We were encouraged by the initiatives unveiled by Vice-Premier Mr Li Keqiang during his visit here last month.
 
The initiatives that were unveiled by him included launching pilot projects for foreign banks to replenish capital with renminbi, and supporting local enterprises in making direct investment on the Mainland in renminbi. Our RMB Qualified Foreign Institutional Investors (RQFIIs) will be allowed to invest in Mainland securities markets with an initial size of RMB20 billion. In addition, the Central Government will expand its programme of sovereign bond issuance here as well as encourage more Mainland firms to list on our stock market.
 
Renminbi business 
These measures will broaden the development of the offshore renminbi market in Hong Kong. They will also help to expand channels for the flow and circulation of renminbi funds between Hong Kong and the Mainland and these will also give further impetus to the development of Hong Kong's offshore renminbi business.
 
After experience and teamwork, the third point is good planning. By successfully reaching each milestone along the way, we can move on to the next phase of Hong Kong's development as an offshore renminbi centre.
 
This is the story so far.
 
I can still recall that back in 2003, when I took over as Financial Secretary, we were starting the discussion with Beijing about Hong Kong's role in conducting renminbi business. Since then we have been working on the principle that this initiative should be mutually beneficial. On the one hand, we recognise the significance of renminbi business to Hong Kong's aspirations as an international financial centre. At the same time, we have a vital role to play in the gradual and orderly liberalisation of the Mainland currency, while acting as a firewall between onshore and offshore business.
 
The first major milestone occurred with the introduction of offshore renminbi banking in Hong Kong in 2004. Our banking sector embraced the challenge. The scope of this business has been expanding progressively over the years. 
 
Initially, the renminbi business scheme covered mainly banking services for personal customers, such as deposit-taking, currency exchange, remittances and debit and credit card services. Today, companies around the world can hold renminbi accounts while local banks can create investment products and provide conversion services.
 
Around 130 authorised institutions are engaged in renminbi business with total deposits of more than RMB570 billion. 
 
The second major milestone came in 2007 when we established the first and only offshore renminbi bond market. In the first eight months of this year, there were 52 issuances of renminbi bonds amounting to a total of RMB76 billion. That is more than double the amount for the whole of last year.
 
The range of issuers has widened considerably. Initially mostly Mainland financial institutions issued renminbi bonds. More recently local and multinational companies and institutions such as Volkswagen, Unilever and McDonald's Corporation as well as the World Bank and Asian Development Bank have successfully issued the so-called "dim sum" bonds. I am not surprised that McDonald's will call it McBonds.
 
The types of renminbi wealth management products have also expanded to include insurance schemes and investment funds. Earlier this year, the first renminbi real estate investment trust (REIT) was listed on the Hong Kong Stock Exchange.
 
We have grasped this opportunity to develop a world-class financial institution and a world-class financial infrastructure. In 2007, we set up the Renminbi Real Time Gross Settlement system to enable renminbi transactions to be handled smoothly and efficiently.
 
In 2009 the Central Government introduced a renminbi trade settlement scheme. Following a familiar pattern, this scheme was expanded gradually and now covers companies across the Mainland.
 
This has opened up a whole new area for the development of offshore renminbi business in Hong Kong. Around 180 banks are currently using Hong Kong's renminbi clearing platform. This includes subsidiaries and branches of overseas banks and overseas branches of Mainland banks. Our renminbi payment settlement network covers over 30 countries around the world.
 
The volume of renminbi trade settlement transactions handled by banks in Hong Kong has increased significantly. In the first half of 2010 the monthly average of such settlement in Hong Kong was less than RMB5 billion. In the first half of this year, it was over RMB130 billion a month. Although this initiative is still at an early stage, Hong Kong already accounts for more than 80 per cent of the Mainland's total renminbi trade settlement.
 
Through our experience as an international financial centre, close co-ordination with the Central Government's ambitions and good planning, Hong Kong is now the location of choice for offshore renminbi business. We have a reliable and efficient infrastructure in place and our liquidity pool is expanding all the time. And of course we have all of you who are experts in the business. 
 
Renminbi dimension
My fourth and final point today is our vision for expanding the renminbi dimension. To achieve this goal, we need to capitalise on our first-mover advantage.
 
With the head start in conducting offshore renminbi business, Hong Kong stands ready to play an important role in this new phase of China's reform and financial liberalisation. Not only will this translate into business opportunities for our banks and financial professionals, it will also raise our city's profile as China's international financial centre.
 
Like a climber tackling uncharted territory, we need to see the big picture. In other words, we need to look at the mountains, study carefully and anticipate challenges that we are likely to face and plot the best route forward.
 
What would our renminbi hub status look like in, say, 10 years' time? What do we hope to achieve by then? What other building blocks or base camps will be needed to achieve our goals?
 
According to projections by the International Monetary Fund, China will contribute more than one-third of the global economy's growth by 2016. In the next decade, it is likely that the Mainland's trade and direct investment links with the rest of the world will continue to expand rapidly. These activities will increasingly be conducted in renminbi. The internationalisation of the renminbi will bring a new era of opportunities for Hong Kong's development as the offshore renminbi business centre.
 
Three key aspects
In the meantime, we will focus our efforts on three key aspects:
 
First, strengthening Hong Kong's renminbi financial platform. This involves enhancing the flow of capital between the onshore and offshore renminbi markets. Measures announced by Vice-Premier Li last month - including those I have already mentioned today - will support these developments.
 
Second, broadening the range of offshore renminbi products and services. Our banks, financial institutions and our professionals will have an important role to play in this respect. We should strive to further expand renminbi clearing and related banking services at the international wholesale level. We should also aim to enhance banking and capital market financing and wealth management services for corporations at the customer level.
 
The third aspect is raising awareness among overseas corporations and financial institutions about Hong Kong's effectiveness as a financial platform to conduct their renminbi business. The Hong Kong Government and the Hong Kong Monetary Authority are conducting a series of overseas roadshows. These events promote Hong Kong's advantages in renminbi business and encourage stakeholders to join us in making the most of the opportunities available.
 
It is only natural that Hong Kong does not have exclusive rights to offshore renminbi business. We can anticipate growing competition from overseas markets for business using renminbi.
 
As well as being in the right place at the right time, we must capitalise on our wealth of experience, sound planning and close collaboration with the Central Government to maintain our competitive edge.
 
Our banking sector has proven time and again that it is up to the challenge. I have no doubt that our bankers have the vision and determination to take our offshore renminbi business to new heights.
 
Chief Secretary Henry Tang gave this speech at the Hong Kong Institute of Bankers' Third Annual Banking Conference 2011 at the Convention & Exhibition Centre.