Hong Kong eyes bigger role in China's financial reform

China's announcement on Thursday that it will allow cross-market trading by mainland and Hong Kong investors on the Hong Kong and Shanghai stock exchanges has again highlighted the role of the two cities as test beds for China's financial reform.

The step further integrates the advantages of Hong Kong and Shanghai in pushing China's financial reform and sharpens their competitiveness, officials said at the ongoing Boao Forum for Asia (BFA) 2014 Annual Conference.

The cooperation will further consolidate Hong Kong's leading role as a major offshore Renminbi (RMB) business center, said Hong Kong Chief Executive CY Leung at a dinner party attended by top Chinese mainland and Hong Kong financial officials.

This year marks the tenth year after the establishment of Hong Kong as an offshore RMB business center, with accumulated RMB deposits and deposit certificates reaching 1.128 trillion yuan (181.6 billion U.S. dollars) by the end of February.

We should encourage inclusive and mutual development for Hong Kong and mainland cities such as Shanghai, as they have different advantages, said Central bank governor Zhou Xiaochuan.

Hong Kong, as a highly international and open financial center, has been a supportive partner in driving the Chinese mainland's opening up, Zhou added.

China's opening of its capital market is a significant move, and a more mature financial sector will grow gradually, which will be a boon for the Hong Kong market as well, said Chan Ka-keung, Hong Kong's financial services and treasury secretary.

There has been debate about whether the Shanghai Free Trade Zone (FTZ), established last year mainly as a pilot for financial reform, would challenge Hong Kong's established role as a major international financial center.

The Shanghai FTZ has made key steps, including easing cross-border use of the RMB, liberalizing interest rates on foreign currency loans, and facilitating offshore financing and outbound investment.

Full convertibility of the RMB and facilitating offshore financing will be rolled out in the second quarter of 2014 in the FTZ. Trading of crude oil futures on the Shanghai International Energy Exchange is expected to start by the end of the year.

"Shanghai is not just a preferential-policy-centered platform, but a test bed for pushing domestic reform and international financing," said Chen Jingwei, chairman of the All-China Federation of Industry & Commerce.

Hong Kong and Shanghai have a lot on which to cooperate, as the former is more international and open with a mature market and experienced regulation, while mainland cities such as Shanghai have enormous market potential for financing, Chen said.

Meanwhile, Hong Kong has to cooperate with other financial centers to shore up its leading role and edge in its offshore RMB business, said Hong Pizheng, CEO of Standard Chartered Bank in Hong Kong.

Hong Kong has been at the forefront of China's moves to make its currency a globally accepted form of payment.

The city not only has the largest offshore deposit base of RMB, but is also the biggest trading center for the currency outside the mainland.

The Renminbi qualified foreign institutional investor (RQFII) program, a quota system enabling RMB holders to invest directly in the Chinese mainland, was first tested and then expanded in Hong Kong in 2012.

However, despite a head start, others are catching up. Taiwan has an offshore debt market and its own clearing house, while London and Singapore both received their own RQFII investment quotas last year.

The offshore RMB business program is not about a single spot, but an international network, and Hong Kong has to be its hub or the leading player, said Laura M Cha, chairwoman of Hong Kong Financial Services Development Council.

Hong Kong is glad to see other cities develop offshore RMB business and is willing to take the lead in globalizing the Chinese yuan as it will boost the city's competitiveness and prompt it to be a bridge linking China and the world in the financial sector, said CY Leung.

Financial centers are naturally open to international competition, and with pressure comes innovation. Hong Kong has promising prospects for consolidating its leading role as an international financial center, Zhou added.