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There is no denying or escaping the difficulties in major markets in the Eurozone and in the US, or their impact on the rest of the world.
I am encouraged by recent developments in the Eurozone. The region's support of Greece in its hour of need appears to be having positive results. The recent package of measures announced this week by the Eurozone and the International Monetary Fund will help boost confidence and certainty in the region.
Also, recent indicators from the US suggest that the recovery there is finally gaining some traction. We shall be watching closely to see how Washington deals with the looming fiscal cliff of tax hikes and spending cuts in the coming few weeks. Recent indications are quite positive and optimistic.
Hong Kong is a highly open and externally-oriented economy. We are directly impacted by the financial health of our trading partners. We are also a Chinese city with a role to play in our nation’s economic growth and prosperity.
Today, I shall talk about one particularly significant area of our work that has global implications. This area is the internationalisation of the Mainland currency, the renminbi.
Today, most analysts agree that it is not a case of whether the renminbi will become a reserve currency or not, but when. No doubt there is some way to go. After all, it was only in 2004, eight years ago, that the first set of offshore renminbi banking activities took place, here in Hong Kong.
Launch pad
Since then, Hong Kong has used all its advantages to become the testing laboratory and launching pad for offshore renminbi initiatives and products.
History, as well as logic, dictates that a currency must be in strong demand internationally to become a reserve currency. This demand often comes about through robust domestic economic activity or because of uncertainty in other major jurisdictions. At present, both factors are at play.
For more than three decades, China has experienced generally strong economic growth under policies of reform and opening up to the rest of the world. The result has been rapidly expanding trade and investment links around the world.
Consider this. Mainland China's GDP increased from US$203 billion in 1980 to almost US$2 trillion in 2000. Last year, it reached US$7.3 trillion. Our nation is now the world's second largest economy behind the US, and the world's largest exporter.
Bilateral trade between the Mainland and the European Union has increased six-fold in the past decade. For companies investing in, or doing business with the Mainland, there is a strong case for greater use of the renminbi.
Bridge building
Recognising this trend and the potential demand for renminbi, the Central Government has established three strong bridges to promote the currency's circulation offshore.
The first bridge is offshore renminbi banking, which was launched in Hong Kong eight years ago. The goal here is to establish a pool of renminbi liquidity outside the Mainland.
The second bridge-building exercise was to create demand for offshore renminbi through a renminbi bond market here in Hong Kong, the so-called "dim sum" bonds.
The third bridge is offshore renminbi trade settlement. Today, all trade and current account transactions can be settled using the renminbi.
We are seeing growing demand for renminbi overseas for trade settlement, direct investment and portfolio investment.
Hong Kong is an ideal engine from which the Central Government can drive renminbi liberalisation.
Our city has a long tradition of international trade and finance. Our links with France, for example, go back more than 160 years. In Hong Kong, we have no restrictions on the flow of capital. We have a robust regulatory regime aligned with international standards, and we have a tried and trusted common law legal system.
Well connected
At the same time, we have all the right experience and connections for doing business with the Mainland. We speak the same language; we share the same culture; and we are familiar with each other’s way of doing business.
All this has been critical for Hong Kong to become a fertile testing ground for the gradual liberalisation of the renminbi. In Hong Kong, overseas companies and investors can trade and invest in renminbi, without the capital account restrictions of the Mainland. Demand for renminbi has built up steadily for trade settlement and investment activities.
This has been our experience in recent years. We want our friends from France and elsewhere to come on board and to be part of this financial trend as it gathers pace around the world.
We also take every opportunity to promote the use of renminbi. And there is nowhere better to learn about the potential of offshore renminbi business than right here in Hong Kong from the people who really know the business.
China’s financial hub
The HKSAR Government also holds roadshows in different countries and financial centres to raise awareness about the work we are doing to facilitate the wider use of renminbi overseas. The US and Switzerland are two recent destinations for these roadshows.
Our overriding message is that Hong Kong is China's global financial centre. This is a huge responsibility and one that we take seriously. Not only does it require a great deal of trust and understanding between all parties involved, it also requires strong communication and a collective vision.
This is not something that has been conjured up overnight; it has been built up over many years and decades. Today, Hong Kong's role as the offshore renminbi centre is part of national policy. It is enshrined in the National 12th Five-Year Plan adopted by the Central Government last year.
The plan fully supports Hong Kong's development as a global financial centre, international asset management centre and offshore renminbi business centre. Renminbi liberalisation is a common factor linking these three areas.
Scope broadens
The Central Government in Beijing regularly launches fresh initiatives in Hong Kong, which ultimately deepen and broaden the scope of offshore renminbi business overseas. The most recent round of measures was announced in June this year, highlighting the ongoing and mutually supportive nature of this relationship.
Importantly, Hong Kong has a robust settlement network with our partners in different jurisdictions. This includes a renminbi Real Time Gross Settlement system (RTGS), which provides a reliable and timely framework for renminbi clearance procedures.
We are constantly upgrading the system to provide more convenience and peace of mind for trading partners overseas. Allow me to mention a few of the latest developments.
Since the end of June this year, daily operations of the renminbi RTGS system in Hong Kong have been extended to 15 hours. This gives financial institutions in the European time zone an extended window to settle offshore renminbi payments through the Hong Kong infrastructure.
We also have a Central Moneymarkets Unit, or CMU, that was established by the Hong Kong Monetary Authority in 1990. Last December, the China Development Bank became the first financial institution to issue renminbi bonds through the bond tendering platform of the CMU. This is a sure sign of deepening financial co-operation between Hong Kong and the Mainland. It will also encourage more issuers to use this platform for issuing renminbi bonds.
Global payment network
As of end-September, a total of 199 banks have been participating in Hong Kong's renminbi clearing platform. Of these, 176 were branches and subsidiaries of Mainland and overseas banks. Together they represent an extensive global payment network.
In just the first nine months of this year, banks in Hong Kong handled renminbi trade settlement amounting to over RMB1.9 trillion. That is already more than for the whole of last year. It also represents over 90% of the Mainland’s total external trade settled in renminbi.
So we are headed in the right direction. But please bear in mind that this is still a relatively small drop in the ocean because almost 90% of the Mainland’s total external trade is still settled in a different currency other than the renminbi.
The trick for us now is to expand the depth and range of offshore renminbi products. So far the "dim sum" bond market has performed well. Companies from around the world, including French carmaker Renault, have successfully issued "dim sum" bonds in Hong Kong to raise capital to fund their Mainland operations.
Up to the end of October, there had been 197 renminbi bond issuances with a total issuance size of RMB277 billion.
The Central Government has also issued sovereign bonds in Hong Kong on four separate occasions since 2009. The latest issuance in June was the largest so far at RMB23 billion.
Product range widens
This year alone, Hong Kong has hosted the first renminbi-denominated gold ETF; the world's first deliverable renminbi currency futures, and the first offshore renminbi shares.
We shall continue to develop a wider range of renminbi-denominated products.
Last, but by no means least, a major milestone was reached last December with the introduction of the Renminbi Qualified Foreign Institutional Investors scheme, or the RQFII scheme. The quota under the scheme was increased from RMB20 billion to RMB50 billion in April this year. Eligible institutions are able to invest in the A-share index shares and launch renminbi-denominated A-share ETF products in Hong Kong.
Taken together the topics I have just mentioned represent a gradual but significant emergence of the renminbi as an international currency. But this process is still at a relatively early stage, and Hong Kong has a dual role to play in its future development.
First and foremost, we are the Mainland's close partner in launching, nurturing and expanding the range of offshore renminbi products in the international market.
At the same time, we are a comprehensive one-stop platform for our partners around the world to test-drive renminbi-denominated products, expand their renminbi portfolios and settle trade accounts with the Mainland using renminbi.
Financial Secretary John Tsang gave this address at the Paris Europlace International Financial Forum. (From Hong Kong's Information Services Department)
John Tsang
The Financial Secretary of Hong Kong
