“While Western policymakers are struggling with banks that are ‘too big to fail’, Chinese policymakers are creating something ‘too important to ignore’,” says Daniel Hui of HSBC: the offshore market for renminbi traded in Hong Kong. Known as CNH (CNY is already used for the renminbi), it is seeing phenomenal growth. “Non-existent ten months ago, the CNH market today, with an average estimated daily turnover just shy of $2bn, is already larger than the local currency markets in the Philippines, Indonesia and Malaysia.”
The relationship between renminbi in Hong Kong and renminbi in China is complex; they are “very much separate entities”, says Alexandra Stevenson on the FT.com’s Beyond Brics. China imposes capital controls, so its currency can’t be freely traded. But policymakers aim to “internationalise” the renminbi in due course and have been testing measures such as trade settlement in renminbi. Because China runs a trade surplus, this has resulted in surging renminbi deposits in Hong Kong, which has a separate financial system. Renminbi in a Hong Kong account can’t be freely remitted back to the mainland, so the two pools of currency remain segregated. But after changes last year, renminbi in Hong Kong can be traded internationally. With China planning to use the CNH market as a test-bed for internationalising the renminbi, Hong Kong is developing a range of renminbi financial tools. That includes this week’s launch of a daily fix of the CNH/USD (US dollar) exchange rate. This is important in developing foreign-exchange options and interest-rate swaps.
Given the CNH growth potential, “you might expect Hong Kong to be delighted with its central role”, says Grant Chum of UBS. But there’s a risk the CNH market could damage Hong Kong’s unique financial system, centred on a peg between the Hong Kong (HKD) and US dollar. Loans are growing strongly in HKD terms, but deposits are rushing into CNH accounts to take advantage of expected currency appreciation. This is causing stresses in the banking system and may become unsustainable. The first big impact of the CNH juggernaut may be to force Hong Kong to think the “unthinkable” and ditch “its cherished peg to the US dollar”.