Yuan denominated H-shares

Joseph Yam, former chief executive of the Hong Kong Monetary Authority, discusses ways the yuan will become more of an international currency.

Hong Kong and the Yuan's Internationalization

Yuan-Denominated H shares?

Caixin: If Hong Kong is to serve as an offshore market for the yuan, this means there must be yuan-denominated assets. In this respect, how can the yuan's presence in Hong Kong be increased? Why has yuan business been slow to develop in Hong Kong?

Yam: This needs to be brought about by changes in mainland policy. In order to internationalize the yuan, many policy directions need to be changed.

Yuan deposits were not allowed in Hong Kong until 2004. Next came yuan-denominated bonds. I think the next step will be yuan-denominated stocks. But if the yuan is to become a trading unit, it needs to get out of mainland China.

One of the reasons the yuan business in Hong Kong is slow to develop is because of a settlement agreement between the People's Bank of China and Bank of China (Hong Kong). The government initially maintained a very cautious attitude. For example, they only allowed Hong Kong residents to hold yuan deposits. These restrictions should be lifted. In Hong Kong, all you need is an identity card to open a U.S. dollar account or a euro account. Why can't you open a yuan account?

In terms of bonds, mainland financial institutions can issue them in Hong Kong. Subsidiaries of Hong Kong companies in mainland China can also issue them in Hong Kong. But the problem is, it is the market that should determine who can issue and how much. There should not be a quota, and you should not only allow Hong Kong residents to purchase the bonds.

Another example is the settlement agreement does not allow unauthorized companies to borrow money in Hong Kong then remit it to the mainland. This is also limiting the yuan's development in Hong Kong.

Therefore, I believe the next step is to allow the yuan business to function in accordance with Hong Kong's conventions, and allow it to develop based on market demands. The settlement process and infrastructure between the two markets should be more open, allowing funds to freely flow back to the mainland.

Caixin: If capital flows to the mainland are not regulated, could this encourage hot money and increase the size of the mainland's asset bubble?

Yam: Hong Kong's offshore market is very small. There is no need to worry. The banking system only has tens of billions of yuan. This will not affect the mainland.
Of course, if you don't want the offshore market to negatively impact the home market, then the most important thing is to ensure a strong relationship between the two markets. This means transparent and enforceable settlement. If you feel the home market is being adversely affected, you can use regulatory measures to control it.

Caixin: Currently, the Hong Kong Exchange settlement system already handles yuan products. Hong Kong's securities and interbank settlement systems have already completed preparation work for handling yuan products. How do you think Hong Kong should build and promote this multi-layered yuan product market?

Yam: A lot of work has already been done on Hong Kong's financial infrastructure. There are currently four payment systems: Hong Kong dollar, U.S. dollar, euro and yuan. All four are interconnected, and there is no risk. Now we're just "waiting for the car to arrive." In order for this to happen, mainland China needs to give the green light.

For example, giving investors a choice to trade stocks with yuan. If there were yuan-denominated shares on the Hong Kong Exchange, the market would be very active.
There are technical problems with yuan-denominated stocks, such as brokers can't open yuan accounts. This is a result of the settlement agreement, so the agreement needs to be changed. We need to let non-Hong Kong residents open yuan accounts. Of course, if the money is not clean, we wouldn't allow it. This would need to be supervised.