【Local】China accelerates capital liberalization, HK poised to benefit

With the opening of the Shanghai-Hong Kong Stock Connect in November, China is seen accelerating its pace to open up its capital accounts by the launch of schemes allowing mainland Chinese institutions and nationals to invest their renminbi in overseas markets and companies to issue RMB-denominated shares abroad.


Wang Dan, an officer from People’s Bank of China (PBOC), said on October 9 that with the increasing cross-border use of the yuan, it is time for China to expand capital liberalization.


The Schemes and RMB

Among these liberalization schemes is the Shanghai-Hong Kong Stock Link which allows investors of Shanghai and Hong Kong to buy stocks in the other stock exchange from November 17. One the same day, Beijing launched the Renminbi Qualified Domestic Institutional Investor (RQDII) program that allows qualified domestic institutional investors to invest their yuan in overseas assets. The PBOC is also drafting rules to govern another program, Qualified Domestic Residents (QDR), to allow qualified domestic individual investors to invest in overseas stock markets.


Liao Qun, chief economist of China Citic Bank International, said: “After 36 years of economic reform, China has nearly fully opened its commodity market and futures market but not its capital market. The current QFII strategy has a very low limit, so it is necessary and it is definitely the right time to liberalize the capital market and allow more freedom.”


Mr. Liao also pointed out that the government has allowed new channels of outflow of the yuan in order to support the internationalization of the currency. He quoted a report by HSBC stating that the yuan is expected to become the fourth largest payment currency by 2020, after the US dollar, British pound and euro. By that time, 28 per cent of China’s foreign trade will be settled in the yuan, which might reach as high as US$3 trillion.


He added that with the strict limits of the Shanghai-Hong Kong Stock Connect, RQDII and QDR schemes, there was no need to worry about any sudden large outflow of RMB as a result of malicious stock price manipulation by institutions.


For the Shanghai-Hong Kong Stock Link, the daily trading limit is RMB 300 billion for the Shanghai stock exchange and RMB 250 billion for the Hong Kong stock exchange. The authorized investment amounts of QDII, QFII and RQFII are US$87.37 billion, US$64.1 billion and RMB 294.4 billion respectively by October 30, 2014.


The Schemes and Economy

Hong Hao, managing director of the Bank of Communications International, also said that as the second largest economy in the world and with the largest foreign exchange reserves of any country, China faces much less risk in the process of capital liberalization compared with smaller economic entities such as Thailand and South Korea which saw their currencies battered by the markets during the Asian financial crisis in 1997.


“The difficulty domestic companies face securing financing will also be significantly reduced in the future stages of capital liberalization,” said Mr. Liao, “The aim of all these measures is to help companies go out and seek opportunities overseas.”


The Schemes and Hong Kong

From Hong Kong’s perspective, Mr. Liao believed that as the biggest offshore RMB centre, Hong Kong can definitely take advantage of China’s capital market liberalization.


On the same day of the inauguration of the Shanghai-Hong Kong Stock Connect, a limit on Hong Kong residents to exchange up to RMB 20,000 a day has been lifted.


Although China is seeking cooperation with the United Kingdom and Singapore on RQDII, and Australia joined RQFII in November as well, Mr. Liao believes that Hong Kong will continue to serve as the best choice for the internationalization of RMB.


However, he admitted that with the rapid opening-up of the mainland market, more international cooperation can be done in Shanghai rather than Hong Kong. For example, Carmen Ling, global head of Renminbi Solutions at Standard Chartered Bank predicted in a press conference in London that if Shanghai-Hong Kong Stock Connect turns out to be very successful, then the same kind of connection may be made between Shanghai and London, and Shanghai and New York in the future.


Mr. Hong emphasized: “Whether Hong Kong can retain its status as the biggest RMB offshore trading centre depends on the market’s performance as well as central government policy. Certainly Hong Kong will benefit more if new policies to guarantee its position are brought out. ”


by Jessica Tian

《The Young Financial Post 新報人財經》



新報人財經 / The Young Financial Post 2014-15

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