Internationalization of the yuan and the key role of Hong Kong

  press review | August 7, 2024

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Quotedbusiness - 07.08.2024

Hong Kong could serve as an offshore hub for the yuan

According to a recent report published by Renmin University, as mainland China seeks to expand the use of the yuan in international transactions, Hong Kong will likely have a larger role to play in this process.

While Hong Kong has long been the largest offshore clearinghouse for the yuan (mainland China's currency, also known as the renminbi), under current geopolitical and economic conditions, Beijing may see a ripe opportunity to internationalize the yuan.

Following Russia's invasion of Ukraine in 2022, the yuan became a regional reserve currency for Moscow, as its access to the US dollar was limited following the imposition of sanctions.

This has led to the renminbi becoming a new risk mitigation currency. Furthermore, international investors could invest in [mainland] China's financial market through Hong Kong and would be able to avoid US sanctions.

Hong Kong had about 1.1 trillion yuan ($151.7 billion) in offshore deposits as of May, according to data from the Hong Kong Monetary Authority (HKMA), its de facto central bank.

Now, in light of the prolonged period of high interest rates from the US Federal Reserve and low interest rates from the PBOC (China's central bank), the environment appears favorable for the issuance of offshore renminbi bonds.

While Hong Kong plays a key role in the potential internationalization of the yuan, Beijing is aware of having to face competition from foreign hubs such as London and Singapore (and continental counterparts such as Shanghai and Shenzhen).

In summary, Hong Kong must carefully consider the balance between managing an appropriate share of the offshore yuan pool and the safety and stability of its financial market. Not forgetting that, although the yuan has had a growing presence in foreign trade, its use in global finance remains low compared to the US dollar and the euro.