MNI: Hong Kong Tipped For Greater Offshore Yuan Role

Hong Kong’s status as an offshore yuan hub could grow as China accelerates the currency’s internationalisation and improves its flexibility, according to policy advisors and former officials. China’s push follows heightened interest from emerging market countries that want to diversify their payment and reserve options.

Solutions will be needed as countries explore alternatives to the U.S. dollar, according to Huang Yiping, deputy dean of the National School of Development at Peking University. The currency is unlikely to be fully convertible anytime soon, which will challenge its international usage, he told MNI.

Chinese regulators could further develop the Hong Kong offshore yuan (CNH) market, which overseas investors already actively trade, Huang suggested. Developing Hong Kong as China’s offshore trading hub for yuan-denominated assets will allow for a gradual opening of the country’s domestic financial market, while meeting demand for yuan as an investment currency, he continued.

Authorities recently have reengaged with yuan internationalisation efforts focusing on its role as an investment and reserve currency after shelving plans over 2015-2016 when the currency suffered sharp depreciation, Huang said. He noted a number of countries have investigated yuan settlement over security concerns, following the Russia-Ukraine war and the subsequent “weaponisation” of the U.S. dollar.

The Hong Kong Stock Exchange revealed plans in March to launch a yuan counter for stock trading as part of the dual-currency model sometime within the first half of 2023. The move will allow investors to switch between stocks traded in both Hong Kong dollars and CNH.

GLOBAL TRADE

China wants to increase the yuan’s global role in trade settlement, particularly in commodities. Last week, Brazil and China agreed to settle bilateral trade in local currencies, while China’s state-owned oil company CNOOC Group and France’s TotalEnergies settled the first liquified natural gas trade in yuan.

Zhu Jun, former head of the International Department at the People’s Bank of China, told MNI the yuan’s globalisation would benefit from China’s economic recovery. Some countries are diversifying their reserves and payment currencies to hedge geopolitical risk, she noted.

Huang, also a former member of PBOC’s monetary policy committee, explained developing countries are vulnerable to balance-of-payment crises as they typically cannot borrow in their local currencies. The use of domestic currencies in trade can minimise currency-mismatch risk, he said. Settlement of commodities in yuan represents a key step for the currency’s global use, Huang argued.

CHALLENGES AHEAD

However, the lack of full convertibility in the capital account will deter international investors. Ernie Thrasher, chief executive at Xcoal Energy & Resource, told MNI non-convertibility limits the yuan’s global use, despite recent expansionary efforts. Xcoal’s subsidiary settles about USD10-12 million a year of trade with Chinese partners – quite a small amount, he said.

CNY accounted for about 2.19% of global trade in February, up from 1.91% the prior month – the fifth most active currency for global payments by value – according to the Society for Worldwide Interbank Financial Telecommunication. USD recorded 41.1%, while the euro stood at 36.4%, the data showed. The yuan, meanwhile, accounted for 2.69% of global foreign exchange reserves in Q4 2022, down from 2.76% the previous quarter, according to the International Monetary Fund.