Monday, 8 June 2015

Market linkage HK's natural advantage

Financial Secretary John Tsang

It is clear that the competition is rising throughout the region. But I always believe that competition drives progress. Hong Kong and our ostensible "competitors" can complement each other by capturing the opportunities arising from our increasingly connected and integrated financial markets.


Market linkage is Hong Kong's natural competitive advantage. Overseas market participants wanting to tap the opportunities in the Mainland, along with those of other new markets in Asia, particularly South East Asia, are keen on establishing a presence right here in Hong Kong.


They are here to take full advantage of "one country, two systems", here to cash in on our strengths as an international financial centre, here to make use of our role as the principal conduit to the Mainland's financial markets as liberalisation progresses.


Down the road, I believe that Hong Kong will consolidate its position as the hub for financial services in this region. It will continue to expand its development potential along this liberalisation journey. With that in mind, I would like to spend the next few minutes talking about what we are up to in this regard.


Hong Kong has long blazed a trail of financial innovation. Over the past few months, that role has, if anything, accelerated. Our latest initiative is the mutual recognition of funds, or the "MRF" arrangement, between the Mainland and Hong Kong.


From July 1, qualified Mainland funds and Hong Kong funds may be offered, directly, to retail investors in each other's markets - after gaining some streamlined authorisation.


New channel to funds flow

This is the first MRF arrangement between the Mainland and another market. It is also a major breakthrough in the development of mutual access between the capital markets of Hong Kong and the Mainland. No less important, it will open up a new channel to mutual traffic flow between the Mainland and international markets via Hong Kong. And that can only broaden cross-border investment.


Given the size and potential of the combined Hong Kong-Mainland market, the mutually recognised market for funds will become Asia's largest, boosting the region's asset management industry, while enhancing the competitiveness of both sides.


Indeed, the arrangement can transform Hong Kong from a fund-distribution centre into a major fund domicile, sharpening our competitive edge as a premier international asset management centre.


Many asset managers are already strengthening their Hong Kong operation in preparation for the launch, establishing their distribution network and getting familiar with the requirements of the Mainland markets.


Offshore renminbi centre

For Hong Kong, the arrangement will also help promote the internationalisation of renminbi. And that will surely reinforce our position as the pre-eminent offshore renminbi centre.


That role, as the offshore renminbi centre, began in 2004, when the first offshore clearing bank was appointed in Hong Kong and local banks in Hong Kong were authorised to launch personal renminbi products for Hong Kong residents.


We have come a long way since then. The amount of deposits and CDs (certificates of deposit) in Hong Kong had added up to more than a trillion yuan now. That accounted for about 60% of the world's offshore pool of renminbi liquidity by the end of March this year.


In 2007, the first offshore renminbi bond, known as a "dim sum" bond, was issued. By the end of March last year, nearly 500 such dim sum bonds had been issued, with an outstanding balance totalling RMB 370 billion. This has helped establish renminbi as a funding currency in the offshore market, where interest rates are determined entirely by market forces.


Renminbi began taking on the role of a settlement currency for international trade in 2009, with the introduction of the cross-border trade settlement scheme. Last year, renminbi-denominated trades worth more than RMB6 billion were settled by banks in Hong Kong. That's a jump of 63%, year-on-year. Renminbi is now the world's fifth largest payment currency, and Hong Kong handles about 70% of the business.


Investor scheme set to expand

The Renminbi Qualified Foreign Institutional Investor scheme, the so-called RQFII scheme, introduced in Hong Kong in 2011, put the renminbi firmly on the map of investment currencies. We are now in discussion with the Central Government to expand the scheme's fully used quota of RMB270 billion.


That, in fast-forward mode, demonstrated how the renminbi was established as a rising international funding, trading and investment currency, and how Hong Kong has contributed to these developments and at the same time emerged as the world's largest offshore renminbi centre.


The Shanghai-Hong Kong Stock Connect, launched only last November, is another smart step in the Mainland's financial liberalisation. Another illustration of Hong Kong's central role in the Mainland's opening of its capital markets to the world.


The Shanghai-Hong Kong Stock Connect is a mutually beneficial development, expanding sources of investment for both our stock markets, while boosting their competitiveness.


Stock Connect strengthens ties

It also strengthens strategic interaction between the Hong Kong and the Mainland markets, catalysing the two-way renminbi fund flow between onshore and offshore markets. And, of course, it enhances Hong Kong's position as both the leading international financial centre in the Asian time zone as well as the world's premier offshore renminbi business centre.


The scheme has been operating smoothly since its launch, with trading volume blooming through spring. In April, both Shanghai-bound and Hong Kong-bound turnovers broke monthly trading records.


Next up is the Shenzhen-Hong Kong Stock Connect, which we hope to launch later on this year. And for sure, this will be another bumper crop.


Then there is the ambitious One Belt, One Road or OBOR initiative, encompassing the Silk Road Economic Belt as well as the 21st Century Maritime Silk Road linked initiatives, personally spearheaded by President Xi - a boundless opportunity for Hong Kong and its financial services sector. I believe that this initiative can offer us at least four outsized opportunities.


‘Belt-Road’ opportunities abound

First, Hong Kong has long been a major Asian investment and financing centre. And the opportunities are certain to grow as the OBOR initiatives grow. With this in mind, we shall encourage the Mainland and overseas companies to launch IPOs or to raise capital through post-listing arrangements here in Hong Kong, and to gain financing through such means as bond issuances as well as bank loans, in order to support the region's business development.


Second, we anticipate that OBOR developments will accelerate the internationalisation of the renminbi as a trade-settlement and investment currency. To take full advantage of this, we shall expand our role and offerings as a global offshore Renminbi hub.


Third, Hong Kong, a global centre for asset management, risk management and corporate treasury, is well-placed to handle the demand from financial institutions and enterprises taking part in OBOR projects, and there will be many. And major insurance companies and international reinsurance companies here in Hong Kong can provide their services for major infrastructure projects.


Finally, as there are many Islamic countries along the OBOR route, demand for shariah-compliant financial services would be significant. Last month, our Government successfully offered the second sukuk, with an issuance size of US$1 billion over a tenor of five years. This demonstrates that using Hong Kong for sukuk issuance is a viable fund-raising option.


I invite you to join us in seizing all these opportunities that I have just mentioned. They are large and welcoming today, and they are certain to grow and proliferate down the Asian financial road. Given the breakthrough financial developments remaking the Mainland and the region as a whole, it is the fast road to your future.


Financial Secretary John Tsang gave these remarks at the Morningstar Institutional Conference Asia 2015.


Otmane El Rhazi
Department of Commerce
Economic Development
Text/Mobile, +44 7414 782 320

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