Letter from... Hong Kong

Hong Kong, a city with one of the highest representations of banks in the world, is positioning itself as a key player to share in the economic might of what most anticipate will be the next major international currency: the Chinese renminbi (RMB).

China’s entry to the World Trade Organisation has opened the door to foreign banks - which under the “one country, two systems” governance includes Hong Kong - to compete commercially with local banks, conducting offshore currency business with local clients. As the competition intensifies among possible new markets entrants, Hong Kong has made a pre-emptive strike by allowing its banks to conduct personal RMB business (including deposits, remittances, exchanges and credit card business) on a trial basis.

The initiative, in collaboration with the People’s Bank of China, was welcomed by banks in Hong Kong, where the mainland yuan is the second most popular currency (after the Hong Kong dollar). A bountiful cash flow followed. Sixteen months after the launch in February 2004, 38 banks are engaged in RMB business, and RMB deposits in Hong Kong now amount to around RMB17bn. The two governments are keen to expand the scope of RMB business, notably by establishing a clearing and settlement platform for RMB transactions.

According to HSBC executive director, Peter Wong, the move is a “softly, softly” approach that will cushion the impact of the eventual floating of RMB - a currency he predicts may one day be “a goldmine”.

“Everybody knows from day one that having RMB on a personal customer level is not going to be a goldmine. Everybody understands that this is an investment; it is a start. But as time goes on, and trading between Hong Kong and China becomes dominated by RMB once the corporate sector kicks in, then there will be higher expectations of revenue. It will be a goldmine, eventually.”

The move will eventually enhance Hong Kong’s bridging role for money flows between China and the rest of the world, Wong said.

“If RMB in the future is to become instantly recognisable, having services in Hong Kong - which is an international financial centre - will definitely improve the experience at an international level. It will let people see what the potential issues will be (overseas).”

Cross-border RMB services also improve the flow of business resulting from Cepa (the free trade agreement between Hong Kong and the Chinese mainland), said Wong. “Hong Kong companies know the China market much better than foreign companies. A merger in Hong Kong would definitely reduce the risk of doing business in China.”

Tan Kong Khoon, head of consumer banking at Standard Chartered (Hong Kong), says that its experience and familiarity with handling the mainland currency will benefit Hong Kong as the commercial need for RMB rises internationally.

“The rapidly expanding role played by the Chinese mainland economy in international trade is increasing the attention to RMB,” Tan said. “Although not fully convertible, the RMB’s impact on global finance and monetary spheres is increasing.

“The large number of Chinese travelling overseas for business and pleasure is also helping the currency (especially the physical notes) to become more acceptable overseas, especially in Asia. This growing influence of the RMB is felt nowhere more keenly than in the Hong Kong Special Administrative Region (SAR), as its geographical proximity to the mainland has led to the establishment of closer economic ties.”

The significance of renminbi businesses in Hong Kong goes far beyond an additional currency for banks to accept as deposits, he added. It means the development of clearing and settlement capabilities in RMB by Hong Kong banks, with the system linked with that on the mainland.

“Having the advantage of experience in offering the currently permitted services, participating banks in Hong Kong are also better prepared than others to develop the capability to deal in other renminbi-denominated financial transactions, when and should these services become available.”

This would also help Hong Kong evolve into the mainland’s financial centre, he said.

Peta Tomlinson is a freelance journalist who writes for the South China Morning Post and the Hong Kong Trade Development Council.