The People’s Bank of China (PBoC) is set to make a Hong Kong entrance. On June 8, the Hong Kong Economic Times quoted an unnamed source at the PBoC as saying the state bank will open a new office in Hong Kong to facilitate its offshore renminbi, or CNH, lending and investment business. The broader aim of this office is to accelerate the internationalization of the offshore currency.
The report further noted that the PBoC will set up a CNH-denominated fund for direct outward investment, though it is unclear if the benefactors of these loans would be individuals, state-backed enterprises or non-Chinese corporates.
The timing of these moves was not mentioned, but the possibilities have Hong Kong’s financial industry thinking. Hong Kong-based dealers, analysts and China economists, who spoke to Asiamoney Plus, each had a different view as to why Hong Kong was about to get an important new houseguest.
Some felt it was because the PBoC wants to more closely guide the development of the CNH market. Others wonder whether the central bank is looking to launch a lending fund to influence the development of interest-rate benchmarks, while others still noted that the PBoC might merely want to help finance companies in the name of internationalizing the offshore currency.
It is quite possible that PBoC’s motives are a mixture of all three, with more goals besides.
The central bank’s office launch is said to coincide with the 15th anniversary of the Hong Kong handover on July 1 – an event that is even bringing president Hu Jintao to the special administration region (SAR).
To commemorate the strengthening ties between the onshore and offshore markets, the finance industry expects Hu to announce new renminbi-focused policies and initiatives, which supposedly include a relaxation of the personal conversion quota, the introduction of new renminbi exchange-traded funds (ETFs) and the launch of derivatives.
This is exciting for an industry that has dreamt of more CNH-denominated products which can sop up the more-than Rmb550 billion ($86.5 billion) sitting in Hong Kong deposits.
However, it also leads to the inevitable question: what will this PBoC office mean for the Hong Kong Monetary Authority (HKMA)?
Part of the job of Hong Kong’s premier financial regulator is to introduce new CNH-denominated financial tools, implement capital requirements for banks and create all the necessary benchmarks. If the PBoC wants more out of the offshore market, the two agencies will have to work hand in hand.
However, during the years since the CNH was established, it has become apparent that the HKMA’s power extends only so far. The best that the de facto central bank of Hong Kong can do is work steadily with onshore regulators to make the most of China’s opening capital account. But the HKMA’s ability to guide and develop changes related to the CNH has proven strictly limited.
In the CNH loan market, for example, bank lenders generally “take the Libor rate and add a few basis points to adjust to the borrower’s risk,” says one Greater China economist. Another debt syndicate source explains that “we use a few banks’ interest rates and pull their average” as a loose benchmark rate.
This might work for current use but it is an unsustainable method of pricing determination if the CNH currency is to become more traded and important.
In response to the loan market’s cry for help, the HKMA and the Treasury Markets Association (TMA) have tried to provide solutions in the form of ‘CNH Hibor’. The industry has been in talks with the HKMA and TMA regarding the rate for more than a year, but the government agencies are said to have held off implementing a true lending benchmark until the market saw more liquidity.
This has left CNH loan dealers at a standstill. As one loan source says: “The HKMA just has to flip the switch [and] it’s close to announcing it”. But it has yet to do so, despite evident efforts to develop the CNH loan market.
However, in light of the new news, industry experts wonder whether the PBoC’s anticipated renminbi lending fund will help to establish genuine CNH interest-rate benchmarks, which are essential to the CNH loan market’s development. Despite the sparse details of the PBoC’s plans, debt analysts and dealers say the PBoC can effect real change pending the size and structure of the fund.
Competing visions
The danger is that the PBoC and HKMA’s visions for the CNH market are not fully in sync with each other.
At a time when some market participants are calling to readjust the Hong Kong dollar peg to be more aligned with the renminbi, the PBoC has voiced its preference that the offshore market’s rates coincide with Shibor, the Shanghai lending rate. This goes hand in hand with the plans of China’s financial regulators to transform Shanghai into a global financial centre by 2020.
With offshore and onshore rates converging, the PBoC might have a window to use its influence, talk up the advantages of having a more closely aligned offshore and onshore market, and sway Hong Kong’s financial industry in favour of its interest-rate benchmarks to provide these highly necessary lending benchmarks.
The financial industry is looking for action, results and growth for the CNH market. If this is the industry’s mindset, it might not be opposed to the PBoC’s plans if there’s upside to be had.
However, while there’s something to be said about the need for progress, a more hands-on approach by the mainland regulatory throws up a real moral hazard about the financial independence of Hong Kong’s market.
Despite the obvious constrictions regarding the HKMA’s dealings with the CNH, the de facto central bank has done a good job of launching products to make the offshore renminbi market more liquid, by allowing for greater net open positions and introducing products such as renminbi futures derivatives, for example.
The HKMA is wholly capable of continuing this good work, and as China continues to open its capital account, it will have more leverage to progress in the market. Given its track record, it is likely to be less than enthused to see the local establishment of the very institution to which it must ultimately kowtow in the name of renminbi development, and rightly so.
The HKMA will need to be careful that this vestigial office of the PBoC does not begin to undermine its ability to control monetary policy in Hong Kong—especially if the office were to start effectively dictating offshore renminbi interest rates and lending benchmarks.
The PBoC has obvious aims to steer the renminbi as the currency’s role in the global financial stage unfolds. Yet this aim does not necessarily always dovetail with the aims of the HKMA, whose priority is ensuring Hong Kong’s monetary stability. The two goals will frequently dovetail, but not necessarily always.
While the CNH currency remains an offshore entity, and Hong Kong is the hub of its trade and investment, its own regulator must be the final arbiter over how the market develops and is run, both for the good of the offshore renminbi market and for the ‘one country two systems’ agreement that underpins Hong Kong’s political and economic setup.
Hong Kong is a free and transparent financial system, and the SAR’s diligence in keeping the standard while the CNH market develops has made it a success. The HKMA must continue to do this.
For its part, the PBoC must remember: this free financial market is exactly why China selected Hong Kong to be the testing ground for the offshore currency. Even with an office on the ground, it had better not mess with success.