Tuesday, November 19, 2013, 08:37
Strengthening HK as an offshore yuan center
By Oswald Chan and Sophie He in Hong Kong

FSDC submits reports on how to promote financial industry

Hong Kong should more proactively liaise with the mainland on relaxation of the yuan remittance quota, expand the global uses of the yuan currency and consider the launch of QDII3 (qualified domestic institutional investors scheme) in Qianhai, Shenzhen, as Hong Kong’s role as an offshore yuan center is now being fiercely challenged by competitors.

Chief Executive Leung Chun-ying, who expressed the government’s appreciation to the Financial Services Development Council (FSDC) and its five committees for completing the first batch of reports within a few months’ time, said in a statement: “The government and related regulators will carefully study the reports and follow up proactively.”

“The reports also provide a list of very concrete proposals for facilitating diversification of the financial services industry and enhancing the position and functions of Hong Kong as an international financial center,” he said.

The high-level FSDC and cross-sectoral advisory body set up in January submitted the first batch of six research reports to the government on Monday with proposals on how to promote the Hong Kong financial industry.

The FSDC report said that Hong Kong should accelerate its development as an offshore yuan center as the city is facing severe competition from other offshore centers such as London, Singapore and Taiwan.

The FSDC report asserted that Hong Kong’s yuan business is confronting the biggest bottleneck from the lack of, and instability of, yuan liquidity. From December 2011 to September 2013, yuan deposits in Hong Kong (excluding certificates of deposits and interbank deposits) only edged up 24 percent to 730 billion yuan ($129 billion), while yuan deposit growth in other offshore markets skyrocketed by nearly 6.5 times to around 300 billion over the same period.

The slowdown of the yuan appreciation, the ultra-low US dollar interest rate and the slowdown of the mainland’s external trade were cited as reasons that contributed to the slow yuan deposit growth in the city.

Other factors include the narrow channel for cross-border yuan fund flows under the mainland’s capital account, the low return rate of yuan-denominated investment products, and the daily exchange limit of 20,000 yuan for every Hong Kong resident.

In order to bolster Hong Kong’s role, the government has been in discussion with relevant mainland authorities to relax the current daily exchange quota of 20,000 yuan for each Hong Kong resident, develop a yuan asset management hub and promote Hong Kong’s offshore yuan business platform globally.

“The report recognizes that Hong Kong is facing challenges arising from evolving global macroeconomic forces and emerging local threats, and that Hong Kong’s leading position as an international financial center is not entirely secure unless we work relentlessly to advance our competitiveness,” FSDC Chairman Laura Cha Shih May-lung said.

The report noted that Hong Kong can participate more and promote the gradual liberalization of the mainland’s capital account, particularly on reforming the channels for cross-border yuan flows under the capital account.

The pilot QFII3 (qualified foreign institutional investors scheme) to provide 50 billion yuan and $5 billion of the QDII3 quota to Qianhai-registered financial institutions is aimed at boosting the liquidity of Hong Kong’s offshore yuan center.

“We can see that an important part of the FSDC’s proposals is about creating more channels for people (in Hong Kong) to invest the yuan they are holding, as currently, most people just deposit the yuan into banks for very low interests,” said Ivan Chung, a senior analyst at Moody’s.

He said that more yuan-denominated investment products should be created, and for instance, the central government should encourage more companies to issue yuan-denominated bonds in Hong Kong to make interest rate return more attractive.

To diversify and complement the financial services market of Hong Kong further, the FSDC also suggested the development of open-ended investment companies (OEIC), extension of the offshore tax exemption regime to private equity funds and the development of the real estate investment trusts (REITs) market.

Contact the writers at oswald@chinadailyhk.com and sophiehe@chinadailyhk.com