Hong Kong Bolsters Financial Integration with Mainland China through Yuan-Denominated Initiatives
HONG Kong, January 8, 2024 – Hong Kong is poised to strengthen its financial ties with mainland China through a series of new initiatives focused on the Chinese yuan (CNY). These measures, announced by Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue and People’s Bank of China (PBOC) Governor Pan Gongsheng, aim to promote the use of the yuan in international trade and investment, enhancing Hong Kong’s role as a global financial hub. The announcements come at a time when the yuan has weakened against the US dollar, reaching 16-month lows, underscoring the importance of these initiatives in supporting the currency’s internationalization.
Central to these efforts is the launch of a new yuan-denominated trade finance scheme. This program, backed by a substantial 100 billion yuan (approximately $13.64 billion USD) currency swap arrangement between the HKMA and the PBOC, will provide Hong Kong banks with access to cheaper yuan funding. This lower-cost funding, available through swaps with maturities of one, three, and six months, will facilitate cross-border trade settlements in yuan and encourage greater use of the currency in international commerce. The HKMA emphasized that this mechanism will ensure a stable supply of yuan liquidity for Hong Kong’s banking sector, promoting the city’s role as a premier offshore yuan hub.
Furthermore, Hong Kong will expand its Bond Connect program, a key initiative linking mainland China’s bond market with international investors. The program will now include US dollar and euro-denominated bonds, alongside existing yuan-denominated bonds. This expansion signifies a crucial step in broadening access to China’s debt markets, offering international investors greater choice and diversification opportunities. Additionally, the settlement deadline for Bond Connect transactions will be extended to 4:30 p.m. Hong Kong time (0830 GMT), providing increased flexibility for market participants.
The HKMA is also taking steps to enhance the liquidity of the yuan market in Hong Kong. From February 10th, the HKMA will promote yuan repurchase agreements (repos). This will allow international investors to use onshore Chinese bonds as collateral to secure yuan funding in Hong Kong. This move is designed to further deepen the yuan market in Hong Kong and facilitate greater cross-border capital flows. By providing a readily available mechanism for obtaining yuan liquidity, the HKMA aims to attract more international investors to the yuan bond market.
These announcements come as part of a broader effort by China to internationalize the yuan. By strengthening Hong Kong’s role as an offshore yuan center, China aims to facilitate greater use of the yuan in global trade and finance. The weakening of the yuan in recent months has highlighted the challenges involved in promoting wider adoption of the currency. These new measures are intended to address some of these challenges by improving access to yuan funding and expanding investment opportunities.
The initiatives also reflect the growing economic integration between Hong Kong and mainland China. By deepening financial links and promoting the use of the yuan, these measures further cement Hong Kong’s position as a critical gateway for international investors seeking access to the Chinese market. The move also reinforces Hong Kong’s status as a leading international financial center, leveraging its unique position at the intersection of the Chinese and global economies.
The HKMA and PBOC have a long-standing currency swap arrangement totaling 800 billion yuan, demonstrating the depth of their cooperation in supporting the yuan’s internationalization. The new 100 billion yuan allocated for the trade finance scheme is a significant commitment that underscores the importance of this initiative. The expansion of Bond Connect and the promotion of yuan repos further demonstrate the commitment of both central banks to strengthening Hong Kong’s position as a global yuan hub. These initiatives are expected to have a positive impact on the yuan’s international standing and contribute to the ongoing development of Hong Kong’s financial markets.
