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Hong Kong as an offshore RMB clearing hub

Hong Kong will maintain its strategic role in bridging China with the rest of the world, even if more RMB payments are settled elsewhere. With its preeminence in clearing, settlement, and product diversity, Hong Kong can lead in fintech and should capitalise on higher-value products, particularly those that manage risk.

January 13, 2016 | Christopher Balding

The inclusion of the Renminbi (RMB) in the elite International Monetary Fund special drawing rights (SDR) basket of currencies is a largely symbolic recognition of the increased importance of the Chinese economy in the world. China now wants the RMB, which remains relatively unused throughout the world in trade and finance, more widely used.

If Beijing follows through on its promise to fully liberalise the RMB, making it a true international currency by 2020, banks will have the ability to settle RMB trades the world over. Already, the People’s Bank of China has signed a wide range of RMB swap agreements with central banks and is appointing a growing list of clearing and settlement banks at key cities around the world.

Hong Kong is a major financial center and trade facilitator for the mainland. It is one of China’s largest RMB transaction partners, befitting its strategic role as a financial center. Hong Kong has benefited enormously from this privileged position in bridging the gap between the mainland and the rest of the world while also providing financial services unavailable throughout China. Hong Kong currently holds the majority of RMB deposits outside of mainland China and manages the largest amount of financial products from mainland-linked equity to offshore RMB-denominated bonds and everything in between. But with financial transactions requiring RMB set to be handled throughout China and the world, Hong Kong’s present dominance and longer-term role as the primary hub for RMB clearing has become tenuous.

In the long term, Hong Kong’s leading role as the primary RMB clearing and trading hub is far from secure. While it benefited during the early stages of RMB liberalisation owing primarily to its monopoly position, it may not continue to play the dominant role. RMB deposits have started to decline in Hong Kong as Beijing has increased the number of swap agreements with other central banks and appointed new clearing banks...

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China, Markets & Exchanges, Payments, Rmb

Keywords:China, Hong Kong, RMB, IMF, SDR, Payments