Taking Your Place in China's Hong Kong Banquet

by Cesar Bacani, 19 August 2011

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topics:
Management Risk Management

tags:
12th Five-Year Plan CEPA dim-sum bonds Li Keqiang RFQII RMB

If this is what happens when a top Chinese official drops in, Hong Kong’s business community must wish they come to the city more often.

On 17 August, Vice Premier Li Keqiang started a three-day visit with a bang by announcing a number of policy initiatives aimed at “taking Mainland-Hong Kong economic and financial cooperation to a new high.” These include:

Increasing Hong Kong’s access to China’s services sector
Consolidating and upgrading Hong Kong’s status as an international financial centre
Supporting Hong Kong’s drive to become an offshore renminbi centre
Backing Hong Kong’s participation in international and regional economic cooperation bodies
Helping companies in China and Hong Kong ‘go global’ together
Giving full play to Hong Kong’s role in the Pearl Delta metropolitan cluster

Many of these promises were hinted at in China’s 12^th Five-Year Plan unveiled earlier this year, which contained a chapter on Hong Kong and Macau for the first time. What Li has done is put a bit more meat on the bare bones. The fact that the 56-year-old former provincial governor is widely seen as the successor to Premier Wen Jiabao, who is due to retire next year, confers added significance to his words.

The pronouncements apply not only to domestically owned Hong Kong companies, but also to foreign entities that have set up business in the city. The Closer Economic Partnership Arrangement (CEPA) between China and Hong Kong signed in 2003 is nationality-blind – ownership or source of capital has no bearing on whether a company can benefit from CEPA.

Under the free trade agreement, a “legal entity duly constituted or otherwise organised under the applicable laws of Hong Kong and has engaged in substantive business operations in Hong Kong for three to five years” is eligible to become a Hong Kong Service Supplier – and could thus enjoy preferential treatment in the Mainland.

Juicier Dim Sum

Not surprisingly in a city that thrives on financial services, Li’s words on Hong Kong as an offshore renminbi centre attracted attention. “We will have more Mainland-based financial institutions issuing RMB-denominated bonds in Hong Kong, allow Mainland enterprises to issue RMB bonds in Hong Kong, and raise the amount of RMB bonds issued by mainland institutions in Hong Kong,” Li declared.

There’s a lot of money to tap. Hong Kong’s banking system is flush with renminbi deposits – RMB553.6 billion (US$86.8 billion) as of 30 June 2011, according to the Hong Kong Monetary Authority. The outstanding renminbi-denominated debt (known as dim-sum bonds) in the same period is estimated at just RMB131 billion (US$20.5 billion) – equivalent to 24% of the renminbi accounts.

Moody’s Investors Service attributes the bulging renminbi deposits in Hong Kong to the “hundreds of billions of dollars’ worth of annual Chinese merchandise trade” which under prevailing regulations “has been driving the outflow of RMB to the offshore market.” In contrast, says the credit rating agency, “the difficulties in wiring bond proceeds back to China [have] constrained the issuance size of dim-sum bonds.

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