As profound changes unseen in a century are evolving rapidly in the world, Hong Kong should secure the historic opportunity arising from RMB internationalization to strengthen its advantages and assist the country in navigating the path of internationalizing the RMB.

Amid intensifying international geopolitical disputes, with Europe and the US imposing financial sanctions to “weaponize” the US dollar, countries across the world have begun to increase their reserves in other currencies to diversify risks. And in view of the high costs of financing in US dollars due to the US raising interest rates unconventionally, companies are gradually turning to offshore RMB loans. In addition, amid the restructuring of the global economic development landscape, with China’s “Belt and Road” Initiative and the Regional Comprehensive Economic Partnership Agreement (RCEP) developing steadily, the demand for settlement and investment products denominated in RMB has increased, so the internationalization of the RMB is heralding a rare historic opportunity.

The 20th CPC National Congress report mentioned promoting RMB internationalization in an orderly way and the “14th Five-Year” Plan stated to support Hong Kong in its efforts to enhance its status as an international financial center and strengthen its functions as a global offshore RMB business hub, an international asset management center and a risk management center. Given the country’s strong backing, Hong Kong has become the world’s largest offshore RMB center, handling about 76% of the world’s offshore RMB settlements, and 80% of offshore RMB bonds are issued in Hong Kong. Also, Hong Kong’s RMB deposits hit RMB 820 billion, representing over 60% of offshore RMB deposits. Nevertheless, we should see that RMB internationalization still has a long way to go. While giving full play to the increasingly important role of the RMB in trade settlements, the difficulty is in developing the RMB into a reserve currency and pricing currency, and shifting from policy orientation towards market orientation in order to make the RMB truly an international currency. Hong Kong must rise to the challenge to strengthen and expand its advantage as the largest offshore RMB business center.

Perfect Hong Kong’s offshore RMB ecosystem and infrastructure

As the saying goes, “It takes a good blacksmith to forge good iron tools.” For Hong Kong to become stronger and bigger as the largest offshore RMB business center, it should first speed up the construction of its offshore RMB ecosystem, enrich its RMB product offerings, and improve its offshore RMB market infrastructure. These include exploring the connection of qualified institutions in the Qianhai Cooperation Zone to the RMB Cross-Border Interbank Payment System (CIPS), and making it possible for cross-border payments in digital RMB. Hong Kong should actively seek to further expand the quotas for the Shenzhen-Hong Kong Stock Connect, Shanghai-Hong Kong Stock Connect, Bond Connect, Cross-border Wealth Management Connect and ETF Connect schemes, appropriately lower the thresholds for investors, and study the development of a cross-border insurance connect scheme. In addition, it can seek to enhance the overall management of qualified foreign investment institutions (QFII) and RMB qualified foreign institutional investors (RQFII), simplifying the procedures and relaxing the quotas to satisfy the needs of various countries and investors to diversify risks and increase their holdings of RMB assets against the backdrop of intensifying international geopolitical disputes and European and US sanctions to weaponize the US dollar.

Encourage companies to use RMB overseas and raise funds in offshore RMB

Under the principle of “One Country, Two Systems”, Hong Kong has a free and open economic system as well as a transparent and effective common law system. Going forward, we should build on Hong Kong’s high-standard financial industries and professional services to facilitate the use of the RMB by “going global” Chinese companies in engineering projects and overseas industrial parks. In addition, as we are now in a rate hike cycle, the Government should encourage more companies to come to Hong Kong to issue offshore RMB “dim sum bonds” so that they can raise funds at a lower cost than financing in US dollars due to the unconventional interest rate hikes by the Fed in the US.

Promote RMB settlement and set up RMB-denominated commodities trading market

According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the RMB surpassed the Japanese yen to become the world’s fourth-most-used payments currency in 2022. The RMB is projected to become the third largest international currency by 2035. With the implementation of the “Belt and Road” Initiative and the RCEP, mainland China and Hong Kong will collaborate more closely with related countries in the fields of trade, investment and finance, so the demand for settlement and investment denominated in RMB will increase. In addition, Russia supports the use of the RMB for cross-border trade settlements with Asian, Latin American and African countries. While promoting the use of the RMB for trade settlements, Hong Kong can proactively seek support from the country to establish an RMB-denominated commodities trading market in Hong Kong so that over the long run, we can promote the settlement of oil and gas trade in RMB, an initiative advocated by President Xi Jinping at the first China-Gulf Cooperation Council (GCC) summit held last year.

Ride the low-carbon transition express to promote RMB green finance

According to Standard Chartered Bank’s estimates, China would need RMB127 to 192 trillion in investments for it to achieve its “dual carbon” goals by 2060. Internationally, Middle Eastern countries have launched the “Green Middle East” Initiative for green and low-carbon transition and are seeking to diversify investment risks. As Hong Kong is Asia’s largest issuer of green bonds, the Government should catch a ride on the express train of China’s carbon neutrality and the Middle East’s net-zero transition efforts and encourage Mainland provinces, cities and companies, Middle Eastern countries, or cooperation projects between Chinese companies and Middle Eastern companies to issue green bonds in RMB through Hong Kong or conduct carbon trading through HKEX’s marketplace for trading of carbon credits and instruments (Core Climate) to reduce carbon emissions.

This is a free translation. For the exact meaning of the article, please refer to the Chinese version.