HK to bolster role as offshore renminbi hub

China will reinforce the role of the Hong Kong Special Administrative Region as an offshore renminbi hub to bolster its efforts to steadily lift the global profile of the renminbi, a course that is significant for both China and the world economy, according to financial officials and experts.

This would be a feasible option as China seeks to open its financial markets wider to overseas investors, while also forestalling the risks of any drastic fluctuations in cross-border capital flows that could threaten national security amid rising external uncertainties, they said.

Huang Yiping, dean of Peking University's National School of Development, said, "With full capital account liberalization unlikely in the short term, China should consider developing the Hong Kong SAR into the largest offshore renminbi market."

"In this way, although 'nonresidents', or international investors, cannot completely freely enter and exit the capital market of the Chinese mainland, they can freely trade and hold renminbi-denominated assets in the Hong Kong market. This can provide crucial support for internationalizing the renminbi," he said.

Huang's words echoed the resolution adopted at the third plenary session of the 20th Central Committee of the Communist Party of China, which vowed to promote high-standard opening-up of the financial sector, steadily and prudently advance the internationalization of the renminbi and develop offshore renminbi markets.

In an article published in a book to interpret the resolution, Wang Jiang, executive deputy director of the office of the Central Financial Commission — which is responsible for top-level design of financial stability and development — underlined strengthening the function of the Hong Kong SAR as a hub for offshore renminbi business as one of the key means to promote financial opening-up.

Tian Xuan, vice-dean of Tsinghua University's PBC School of Finance, said that Hong Kong's unique position as an international financial center should be further leveraged, citing that Hong Kong's advantages in terms of financial institutions, talent and infrastructure remain significant.

However, Tian highlighted the need to appropriately handle the pace of financial opening-up and renminbi internationalization, especially regarding capital account liberalization.

"We need to continue opening up our capital markets. We still have a long way to go, but we must also learn from the lessons of other economies, particularly those in South America, that took overly aggressive steps that triggered financial chaos and even caused national security concerns."

The resolution also stressed financial security. It said that as China opens wider to the outside world, the country needs to "strengthen financial security mechanisms "and promote the development of a homegrown, controllable cross-border payment system.

In an exclusive interview with China Daily, Zhu Min, former deputy managing director of the International Monetary Fund, said China is gradually advancing renminbi internationalization.

"It will take a long way. But I think the world sees that a dominant US dollar is not necessarily a good thing for the whole world, because US monetary policy and fiscal policy may have a big impact on the dollar's value and capital movements," Zhu said.

"Having a more balanced force against the dollar is good for the whole world. So I think the renminbi will continue to internationalize to serve that role, not only for China, but for the whole world, and particularly for international financial architecture," he added.

The renminbi has recently recovered against the dollar as investors seek diversification amid expectations of a US Federal Reserve rate cut and concerns over a US economic hard landing. The onshore renminbi came in at 7.2583 against the greenback on Monday afternoon, following a 557 basis point rebound on Thursday.

The RMB Internationalization Index, or RII, a comprehensive measure of the currency's global use regarding trade settlements, financial transactions and official reserves, reached 6.32 at the end of 2023, Renmin University of China's International Monetary Institute said on Saturday.

The figure was below the US dollar's 51.52 and the euro's 25.03, but exceeded the Japanese yen's 4.4 and the British pound's 3.76. The RII's full-year average rose 22.9 percent year-on-year to 6.27, highlighting the RMB's momentum as an emerging international currency due to its increasing use.