The UK Treasury and the Hong Kong Monetary Authority (HKMA) have launched a joint private sector forum that aims to improve cooperation between the UK and Hong Kong to support the Chinese government’s development of the offshore RMB market.
The new forum will focus on exploring possible synergies between the UK and Hong Kong in clearing and settlement, market liquidity and the development of new RMB-denominated products. The UK Treasury has stated that its own aim is for London to complement Hong Kong in becoming a major offshore RMB centre.
“Asia will be the engine of world growth in this year and the years ahead,” said UK Chancellor George Osborne. “We in Britain can build on our position as the home of Asian investment and Asian finance in Europe – provided we’re bold enough to do what it takes to make that happen, and we will.”
As a prelude to the agreement with the UK Treasury, the HKMA recently agreed to extend the operating hours of its RMB payment systems to better accommodate European transactions, making it easier to settle RMB transactions in London.
Sources at the London Stock Exchange Group welcomed the project, suggesting that it presented a “great opportunity for London” and a positive development in UK-China relations.
Herbie Skeete, CEO at exchange information provider Mondo Visione, believed the project was a “big deal” for London as an international financial centre, especially given its history as a centre of FX trading. While he cautioned that the effects would likely take time to appear, with a horizon of 12 months tentatively envisioned for the partnership to fully filter through to trading desks, he suggested the deal made good sense for both parties.
“It’s uncertain how long it will be before this is really tangible to buy-side traders – but the potential is definitely there,” he said. “London has scale and expertise in asset classes that goes beyond what’s available in Hong Kong. As the Chinese authorities seek to internationalise the RMB, London is a good choice of partner as it is ideally placed to help build up the new RMB-denominated financial products that will be needed to sustain the renminbi’s growth.”
The development of the offshore RMB market has been gathering pace in recent months. In Q4 2011, regulatory authority the China Securities Regulatory Commission began allowing qualified foreign institutional investors (QFIIs) to invest up to 20 billion offshore RMB in domestic securities – a move intended to boost use of the currency. China’s State Administration of Foreign Exchange stated on 30 December 2011 that it had granted RMB 10.7 billion (US$1.59 billion) in renminbi qualified foreign institutional investor (RQFII) quotas so far, out of a planned RMB 20 billion (US$3.17 billion) in total.
The RQFII program builds on the original QFII program, which is denominated in US dollars. Notably for London, it allows domestic Chinese brokerages and fund companies to raise money offshore for investment in the domestic markets. The RQFII initiative also allows foreign firms to bring investments of offshore renminbi deposits back into China.
Banks in Hong Kong already offer a range of RMB-denominated retail banking services, such as deposit-taking, currency exchange, remittance, debit and credit cards, cheques, and the subscription and trading of yuan bonds, as well as yuan trade settlement. The internationalisation of the RMB is also the most significant component of Hong Kong Exchange and Clearing’s three-year development plan, begun in March 2010, with the development of new RMB-denominated products in interest rate, currency and commodity derivative instruments identified as a priority.