In a first for Hong Kong in the offshore renminbi market, the city is playing catch up.
In a bid to boost its competitiveness with emerging sister renminbi centres London and Singapore, the Hong Kong Monetary Authority (HKMA) has announced that non-residents, for the first time, will be able to freely exchange currencies into offshore renminbi (CNH) without restrictions, quotas, and seemingly without hassle.
They’ll additionally be allowed to delve into other financial goodies, such as opening CNH accounts in Hong Kong banks and take out CNH-denominated loans.
All this is the Special Administration Region’s (SAR) way to move the CNH deposit game away from a resident-only monopoly and get non-Hong Kongers into the mix – a.k.a. lure global citizens’ deposits into Hong Kong, and seemingly away from alternative accounts in London and Singapore.
Hong Kong has so far had a disadvantage in this particular area. Neither Singapore nor London impose currency convertibility restrictions on non-residents, nor bar them from opening up accounts. Hong Kong, which has only allowed its own residents to convert up to Rmb20,000 (US$3,131) a day, has stymied its deposit growth potential.
In a currency market that is becoming increasingly more competitive – and the need for deposits even more essential to encourage development – Hong Kong can’t afford to hamstring itself.
Hong Kong’s deposit base has stalled in 2012 to its current level of Rmb553.9 billion by the end of May, according to the HKMA. This is nearly Rmb35 billion less than the Rmb588.5 billion of bank deposits by December 2011. And that was down from the peak of Rmb627.3 billion in November.
Deposit levels have fallen for a few reasons, largely stemming from the news that the renminbi won’t see significant appreciation against the US dollar. That news, announced by the government in March, dispelled the notion that investors merely needed to park their money in bank accounts with near rock-bottom interest rates in order to accrue the anticipated up-to 8% appreciation gain. Cash then flowed out of banks and into places like dim sum bonds and Renminbi Qualified Foreign Institutional Investor (RQFII) funds.
The growing emphasis on emerging renminbi centres London and Singapore have also provided competition this year and lured new retail and institutional CNH accounts. London (which claimed Rmb109 billion of deposits in April) aims to capitalise on its FX trade strength to cement its role as a renminbi transaction leader. Given its time zone, it is a natural place for European and North American investors to open CNH accounts.
Meanwhile, Singapore (with Rmb60 billion of deposits by June) just received a clearing bank of its own. As a renminbi trade hub, Singapore is in a good position to attract more deposits as import/export players expand their settlement activity.
These are real attributes for these cities and will help them to grow their influence in the offshore renminbi market.
While it’s undisputed that Hong Kong has been the traditional leader in this space due to its relationship and proximity to Beijing, amid this current landscape, the SAR shouldn’t impose overly conservative rules that would hamstring its ability to maintain an edge over the very market it helped to build.
Hong Kong’s guarded approach to the renminbi may well be the influence of Beijing, which has wanted the currency to develop on its own watch. Yet the CNH market is ready to expand, and there are other cities willing to accommodate demand.
There are two main differences that still exist between Hong Kong and its two CNH counterparts. This first is that Hong Kongers will continue to be restricted to the current Rmb20,000-per-day conversion level while non-Hong Kong residents will be allowed free renminbi convertibility. This double standard should be eliminated to create a level playing field for all individuals looking to participate in the CNH market. Hong Kong may find that this added freedom for residents may have a real impact on deposit levels.
The second is the CNH reserve requirement ratio that Hong Kong banks must obey to. This entails that Hong Kong banks must hold 25% of its full renminbi balance sheet in cash or Chinese government bonds and assets traded on the mainland interbank bond market. Singapore and London do not have such requirements, and this frees their banks to make the CNH market as liquid as possible for investors, giving their markets a leg up.
While there is real value to measuring risk and proceeding into this new arena with caution, CNH investors - especially those without a real affiliation to one of the offshore centres - will undoubtedly move freely to where they find the most benefit. For this, Hong Kong needs to parallel its rules to meet global expectations.
Hong Kong financial regulators have begun voicing their concern in this area. In announcing that non-residents will be able to freely convert their renminbi, HKMA deputy chief executive Eddie Yue Wai-man said the new rules will allow the city to "catch up" with the other centres, noting that, “We hope today’s move can help banks to widen their customer base and strengthen their competitiveness”.
Hong Kong will have to continue doing more to accomplish this as other cites’ influence in the renminbi market grows. And if it continues to adhere to rules that other CNH hubs do not, it will see its deposit level continue to drop and new accounts springing up in Singapore and London.