Yang Tao
Earlier this month, the People's Bank of China (the central bank) and the National Development and Reform Commission promulgated provisions involving issuing renminbi bonds in the Hong Kong Special Administrative Region.
Ready to make this major move toward financial reform, China Construction Bank, Bank of China and Import-Export Bank of China published their plans to float renminbi bonds in Hong Kong.
Back in 2003, the Chiangmai (Thailand) Declaration, in the wake of the Asian financial crisis in the late 1990s, urged that regional financial cooperation be reinforced to stave off possible future financial catastrophes. The declaration placed development of the Asian bond market at the core of regional financial integration.
China holds a particularly important place in regional monetary cooperation. But its backward bond market brings uncertainties for the Asian bond market and financial cooperation.
As a result, it is difficult for the country to get involved in overall financial cooperation with other countries.
However, it is desirable to make the best use of Hong Kong's advantageous position as an international financial center and as a bridge between the Chinese mainland and the rest of the world. Cooperation between the mainland and Hong Kong may offer a channel for China to participate in future Asian financial cooperation.
As a matter of fact, issuing renminbi bonds in Hong Kong was much talked about back in 2004. But at the time, the volume of renminbi circulating in Hong Kong and renminbi deposits in the special administrative region were limited. Moreover, a significant portion of renminbi in Hong Kong was circulating through underground avenues.
All taken, the time was not right for floating renminbi bonds in the special administrative region.
Things are different now.
The channels through which the mainland and Hong Kong conduct financial cooperation are fairly developed and the renminbi deposits in Hong Kong reached 25.5 billion yuan (US$3.2 billion) at the end of April.
All this indicates that the time is ripe for floating the renminbi.
Issuing renminbi bonds is of great significance for Hong Kong.
First, Hong Kong's position as an international monetary hub has been challenged since the Asian financial crisis. In addition, the weak local bond market erodes the monetary stability of Hong Kong.
Seizing the opportunity of floating renminbi bonds, Hong Kong is expected to promote a set of monetary facilities covering payment and clearance, which facilitates the development of the local bond market.
In turn, some of its structural defects as an international financial hub will be removed.
Second, floating renminbi bonds will help reduce the risks evolving from rising stock prices and also provide Hong Kong residents with a new monetary product.
Finally, Hong Kong's institutional and technical infrastructures relevant to floating renminbi bonds will be improved. The financial cooperation between the mainland and Hong Kong will grow.
All this combines to provide more powerful support for overall economic cooperation between the two.
Issuing renminbi bonds in Hong Kong is equally important to the mainland because the undertaking helps quicken the pace of the renminbi's internationalization and convertibility.
In Hong Kong, a free capital market, the price of renminbi bonds will fully mirror international investors' expectations of the renminbi's revaluation. This is of reference value for the foreign-exchange reform of the Chinese currency.
In addition, the floating of renminbi bonds will give China more say in pricing renminbi derivatives.
Monetary products such as renminbi bonds are expected to strengthen Hong Kong's status as the center of renminbi offshore derivatives.
Also, floating renminbi bonds in Hong Kong indicates that the opening of the Chinese mainland's capital market has taken another step forward. With this as a starting point, a richer variety of bonds and securities is expected to be issued in the future by many more institutions.
Floating renminbi bonds in Hong Kong will in turn spur the development of the bond market on the mainland.
At present, the mainland bond market still falls short of the needs of the country's rapid economic development, though this market has made impressive advances in recent years. In addition, this bond market needs to be standardized. Floating renminbi bonds in Hong Kong helps in this respect, stimulating the buildup of the mainland bond market's infrastructure and creating progress in transaction rules.
The author is a researcher with the Institute of Finance and Banking, Chinese Academy of Social Sciences
(China Daily June 18, 2007)
