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China’s Offshore Centre

Mark Austen 

The Hong Kong-based Asia Securities Industry and Financial Markets Association was established in 2006 to help develop Asian capital markets and facilitate their orderly integration into the global financial architecture. As the Chinese mainland’s renminbi moves toward becoming a global currency, CEO Mark Austen explains why Hong Kong, with the largest renminbi liquidity pool outside the mainland, plays a key role in the mainland’s financial reforms. 

Why is the next phase of the Chinese mainland’s financial liberalisation pivotal?
China is moving from an export-driven market to a consumer-based society – one that is less reliant on a bank-lending model, and more on a transparent and liquid capital market. The financial liberalisation that is going on now is fundamental in making that move. It includes domestic reform, as well as market access for foreign participants. 

You cannot have a consumer-based society with a closed financial market that is state-dominated and over-reliant on state-owned banks. China has got to get it right, otherwise its economic model won’t work. From what we have observed, they understand this need and are getting it right. 

What can Hong Kong offer to help in this process?
Essentially, its expertise – both from the public and private sector. Hong Kong has a simple tax system, the rule of law, a strong presence of foreign banks, asset managers, law firms and accounting practices, and firms with extensive global expertise.  The city’s unique location right next door enables Hong Kong to lend that expertise across the board in China. And because it is Hong Kong, it is more likely to be listened to than other markets. Hong Kong is also a developed market with a free, open economy. This amounts to a compelling package for helping the China market develop.

How do you see Hong Kong’s role in renminbi trade?
What puts Hong Kong in the position of having a unique role as an offshore renminbi centre is that it has a well-developed market and a strong foreign presence. More importantly, Hong Kong is seen by the world as the gateway to China. Many businesses and financial market participants have set up in Hong Kong to access the Chinese market. China recognised Hong Kong’s role four years ago when it set up its first offshore renminbi centre here.

What’s your view on the establishment of renminbi centres elsewhere in the world?
I see it as the next logical step in the development of the renminbi, which is ultimately to become a free-floating reserve currency with a dominant presence in Asia. Obviously, all that business cannot go through Hong Kong any more than the dollar trade outside the United States all through London – you’d want to spread that around the globe. Singapore and Taiwan now have renminbi centres; London is coming and after that, Sydney. It is a natural progression.

Should Hong Kong feel threatened by this?
I actually see it as a positive development for Hong Kong. Provided that China continues to provide linkages through offshore settlement banks via Hong Kong, the city can continue to benefit from the development of the renminbi. It’s a virtuous circle with the greater the trade flowing offshore, the greater the volume that Hong Kong will facilitate.

What are some of the challenges ahead?
A greater threat to Hong Kong in the medium term is the continued development of Shanghai as a financial centre. Even so, Hong Kong has the advantages of the rule of law and a simplified tax system – it should facilitate a role that Shanghai may not be able to. One way Hong Kong can partly alleviate that threat is to stop being so China-focused, and be more focused on the rest of the region and more connected to rest of the world markets. And while we expect the renminbi to be the dominant currency in Asia in the years ahead, Hong Kong should not forget that there are other currencies, such as the US dollar, and make sure it develops its market in those currencies. A strong global financial centre does not use just one currency play. 

Bottom line? Hong Kong has always reinvented itself. The city has a great entrepreneurial spirit and very driven individuals. I have tremendous faith in Hong Kong’s ability to find a role for itself as China opens up.  

Related Link
Asia Securities Industry & Financial Markets Association

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