Hong Kong's equity market is slated to see its first renminbi (RMB)-denominated transaction in the coming months as internationalisation of the Chinese currency gains traction.
Exchange operator Hong Kong Exchanges and Clearing (HKEx) has launched a series of initiatives to prepare for the listing and trading of RMB products, such as making available the exchange rates for calculating stamp duty and other trading-related fees on RMB and US dollar transactions.
“With an established multi-currency market infrastructure, HKEx is now ready to support the listing, trading and clearing of RMB-denominated products in Hong Kong. Our trading and clearing systems are multi-currency, capable of supporting the processing of RMB transactions,” said an HKEx spokesperson.
Development of the offshore Chinese renminbi (CNH) market in Hong Kong – a market that is seen to have strong backing from People's Bank of China (PBOC), the central bank – has grown from strength to strength since China's move on 16 August to allow qualified financial institutions to repatriate offshore RMB to the domestic bond market. Activities in the CNH market have so far been led by the issuance of CNH bonds and growth of CNH deposits driven by RMB trade settlements. On 19 August, restaurant operator McDonald's became the first multinational to issue a CNH bond in Hong Kong.
The PBOC and the Hong Kong Monetary Authority (HKMA) also relaxed restrictions in relation to developing the CNH market, with the HKMA getting significant amounts of autonomy in developing it and relaxing rules on moving CNH around Hong Kong. Brokers are now able to open RMB accounts as well as obtain RMB credit facilities from banks. RMB can also now be transferred between bank accounts under different names.
Manish Nigam, managing director of equity research at Credit Suisse, says, “Until six months ago, a lot of RMB securities couldn't be cleared via Euroclear and other global settlement systems, but that obstacle has now been removed. Essentially, trading and settlement systems are now all ready for the settlement of RMB securities. At the same time, RMB liquidity has increased significantly in the last few months. In the past, it was only retail that was converting HK dollars to RMB, but trade settlement has taken off very quickly.”
The growing CNH market is clearly making its presence felt in the local bourse, with market participants expecting to see the listing of RMB-denominated equity products over the next few months. Current listing rules have no restrictions on currency denomination, although restrictions on repatriation of RMB funds to mainland China have so far posed major disincentives to RMB listings in Hong Kong.
“As of today, it's theoretically possible to issue in RMB in Hong Kong. Because the first issue has to be a success, it’s important for the right candidate to lead the way, though,” says Nigam, “Over the next six months, it is quite likely that we will get our first RMB-based Hong Kong equity listing because all the systems are in place, liquidity is largely available and there is clearly demand for RMB products.”
Potentially, companies that could be interested in RMB listings in Hong Kong include non-mainland companies with substantial operations in China. “Some non-Chinese companies that have RMB requirements such as imports may also be interested. Some mainland domestic companies may also want to list in Hong Kong but they would still likely require China Securities Regulatory Commission approval,” Nigam notes.
But despite Beijing's keenness to internationalise the RMB, efforts to make the RMB convertible on the capital account will not be progressing at a fast pace.
Thomas Harr, head of Asian FX strategy research at Standard Chartered, says, “China has a clear interest in internationalising the RMB, and that can move relatively fast, but having full convertibility of the RMB is a very different thing and clearly it does seem that the RMB, will continue to be internationalised for trade settlement without having convertibility on the capital account. Convertibility of the RMB on the capital account will be gradual and you won't have full capital convertibility for a very long time.
“What's most important for China is that it wants the expansion of RMB for trade settlement. That's the most obvious way that China is trying to internationalise the RMB.”
Efforts to make Hong Kong the hub for an internationalised RMB stand in conflict to Shanghai's financial ambitions, but Hong Kong is certain to remain the most logical market for CNH trading so long as the RMB is still not fully convertible on the capital account.
“The Chinese government wants to gradually internationalise the RMB and Hong Kong is still the most logical place to do it. RMB remittances back to China still requires case-by-case approval but this has been happening more frequently,” Nigam concludes.