By Hu Rongping (胡蓉萍)
Market, page 19
Issue No. 546, Nov 28, 2011
Translated by Zhu Na
Original Article: [Chinese] 

In November, China’s central bank and the Hong Kong Monetary Authority doubled the size of their currency swap agreement to 400 billion yuan, in a move intended to boost the offshore yuan market and forestall any liquidity problems. The Economic Observer interviewed the chief executive of the HKMA, Chan Tak-Lam Norman (陈德霖) the following day,

The Economic Observer: What does the expanded swap agreement mean for Hong Kong’s financial situation and the offshore yuan market?
Chan Tak-Lam Norman: One of the roles of the currency swap is as an emergency measure. Hong Kong-funded banks have grown in mainland China, opening more and more branches, and if they have a sudden problem, such as a shortage of funds, then they may need RMB not Hong Kong dollars, and, as the regulator, we can provide liquidity using the Hong Kong dollar/RMB swap with the People’s Bank of China. Conversely, Chinese banks in Hong Kong encounter the same issue. This emergency function works in both directions.
Secondly, the development of the offshore RMB market is in an early stage of development right now. In the first year, our RMB deposits increased very fast. The growth has been a bit slow over the last couple of months, but it might accelerate again in the future. Currently, the banks feel they have lots of funds, which is understandable, but the HKMA and the People’s Bank of China see things in the longer-term and on a macro scale. If foreign direct investment takes off, along with Dim Sum bonds and bank loans, then there might be a squeeze on liquidity.
Overseas banks have bases in Hong Kong; sometimes they have lots of funds and sometimes they’re short of funds. When they’re short of funds, they’ll come to Hong Kong’s banks for funds. Hong Kong’s banks aren’t having problems with cash management, but when there’s a sudden squeeze, what should we do? If the offshore market is shaken by a period of volatility, the currency swap can be used as an alternate means of stabilization.

EO: How does Hong Kong interpret the situation in Europe?  Will Hong Kong take part in the European Union’s rescue plan?
Chan: It’s hard to say. It’s mainly a case of monitoring the situation in Spain and Italy. Hong Kong’s foreign exchange reserves aren’t much more than $200 billon. Unlike other places, we can’t use our reserves like a sovereign fund. The uses of our reserves are regulated by law, and must maintain the stability of Hong Kong’s exchange rate and financial system. We buy financial assets, but these must be very safe and highly liquidity. If you’re saying that our aim is to help other countries, then that’s not the way we think. During these volatile times, the most important thing we can do is to keep ourselves safe.

 
EO: RMB deposits in Hong Kong grew very fast in the first six months of 2010 and 2011, but they’ve slowed down over the past couple of months, is this because the RMB offshore business doesn’t have the capacity to develop further?
Chan: I think your statement is incomplete. Sure, people care about the level of offshore RMB deposits, but is this the only indicator? My view is that the development of the offshore market depends not just on the size of the deposit pool, but also on the scale of financial intermediation. If there was no pool of funds, then there couldn’t be an offshore RMB market, but if all we care about is the size of the deposit pool, without any financial intermediation, and all the deposits are held at the People’s Bank of China or its branches, without moving around the system, then more deposits won’t change anything - what we need is a flow.
That flow refers to the activities of financial intermediation from the pool of funds, most importantly through financing, such as the issue of RMB bonds. Last year, RMB bonds issuance was 36 billion yuan, but this year it has reached 93 billion yuan, which includes 20 billion yuan in government bonds from the Ministry of Finance. Part of the 620 billion yuan deposit pool has already been invested in bonds, and many issuers, such as [state-owned steelmaker] Baosteel (宝钢), are still planning to come to Hong Kong, and other enterprises are applying to do so. I believe these issuers will be welcomed in Hong Kong. This shows that our fund pool is full of life.

The EO: What do you think of the recent development of the offshore RMB market in Hong Kong? Is there any sign of a “slow down”?
Chan: I don’t think it’s slowing down. Firstly, in terms of cross-border trade settlement, there was almost no RMB settlement at the beginning of last year, but now 10 percent of foreign trades are settled in yuan.
Secondly, there’s been a change in RMB deposit balances in Hong Kong. At the beginning of last year, Hong Kong’s total RMB deposits were only 63 billion yuan (which were mainly personal deposits), but they increased to 320 billion yuan at the end of last year (mostly due to rapid growth corporate deposits), and reached 620 billion yuan by the end of September.
If we look at RMB lending by Hong Kong banks, the total amount was 2 billion yuan at the beginning of this year, and 19 billion yuan by the end of September. Although it’s still not much, it has increased eightfold. After the launch of foreign direct investment in RMB, there will be more growth. This is because the cost of financing in Hong Kong is more attractive, corporations can invest directly in mainland China using RMB borrowed from Hong Kong banks. All these markets signs show that the offshore RMB market is developing steadily.

This translation was edited by Will Bland.