Another milestone for RMB business
Updated: 2013-05-03 06:10
By Raymond So(HK Edition)
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The Treasury Market Association announced last week that Hong Kong is going to publish the fixing rate of the Hong Kong Interbank Offer Rate (Hibor) for the offshore renminbi market. This is a major development in Hong Kong's financial industry and a milestone in Hong Kong's roadmap as being the major offshore market for renminbi.
From a practical point of view, this announcement is the institutionalization of existing work done by commercial banks. Currently there are 13 commercial banks active in Hong Kong's interbank market for the renminbi. Given that renminbi is not an active international currency, the trading volume and intensity of it cannot be compared with other major international currencies. The Hong Kong Interbank Offer Rate is already available for many major currencies. The inclusion of the renminbi technically is not a breakthrough.
The importance is that offshore renminbi in Hong Kong, also known as CNH, will soon have an authoritative benchmark for its interest rate. And, this benchmark interest rate will further consolidate Hong Kong's position and role as the country's international financial center.
Compare it to the Euro-dollar after World War II in the last century, when European banks started to accept US dollar deposits and to make US dollar loans. Since the US dollar was outside US territory, US regulations could not cover these activities. This gave European banks an edge over their US counterparts in attracting US dollar deposits and making US dollar-denominated loans. London emerged as the leading trading center for the US dollar and became a global financial center.
There is high hope that Hong Kong can benefit from the internationalization of the renminbi in the same way. If the renminbi can be internationalized, what London benefited from trading the US dollar could be replicated again in Hong Kong. From this perspective, any major development of the renminbi business in Hong Kong has important implications.
The CNH Hibor is no exception, and is perhaps even more important. Using the US dollar example, the London Interbank Offer Rate (Libor) is the benchmark interest rate for the US dollar. Many financial products such as syndicated loans are priced according to the Libor. Many derivatives also have the Libor as the underlying asset. Interest rate futures, interest rate options, interest rate swaps, and forward rate agreements are just some of the most commonly traded Libor-denominated derivatives. Also, the finance sectors are inter-related. Again, because of the active trading of the US dollar in London, London also emerged as the major foreign-exchange center, and many other financial activities concentrated in London. From this point of view, if the CNH Hibor is successful, Hong Kong may follow London's footsteps in becoming a truly global financial center.
Nevertheless, Hong Kong still has a long road to travel to become the offshore renminbi center. The renminbi is still in the infancy stage of its internationalization and cannot be comparable with the US dollar. Hence, even though we know there is much potential for the CNH Hibor market, the real benefits are yet to be realized. In other words, we should not expect the gains or benefits to occur overnight. Most likely there will be a long incubation period for CNH business.
Clearly there are a lot of concerns that Hong Kong needs to address. The first is how to ensure the stability and security of the finance sector. Needless to say, one of the major concerns of China in the internationalization of the renminbi is financial stability. Hong Kong should not just look at the potential gains of the CNH Hibor market and overlook the downside of financial risk. Also, Hong Kong should be careful with financial regulation. Last year commercial banks were found to have conducted improper activities in the Libor market. Clearly Hong Kong should learn from this example, especially for the CNH Hibor market. If there were major pitfalls in financial regulation, it will hurt the development of this market. Consequently the development of Hong Kong as the major offshore renminbi market will be adversely affected.
Therefore, Hong Kong must consolidate and improve her regulatory framework in the financial sector. Development and regulation go hand-in-hand in the finance sector. Without proper and sound financial regulation, the market cannot perform well.
The author is dean at the School of Business, Hang Seng Management College.
(HK Edition 05/03/2013 page1)