Executive Councillor Joseph Yam has suggested using Chinese renminbi as well as the Hong Kong dollar to price, trade and settle stocks listed in Hong Kong.
Yam, the former chief executive of the Hong Kong Monetary Authority, said in a new article entitled “International Financial Centre and Monetary and Financial Stability” that the domestic economy of Hong Kong is small, but the volume of international financial activity conducted in Hong Kong and denominated in Hong Kong dollars is huge.
He wrote that, as the mainland relaxes its capital account controls – allowing more investments in the Hong Kong financial markets – the volume contrast between the two will become even greater.
“It would be unrealistic to expect the currency system of an economy of seven million people to have the capacity to serve well the international financial activities between an economy of 1.3 billion people (second largest and soon to be the largest) and the rest of the world,” he wrote.
In July, Yam resumed writing and posting his public blog articles following a five year hiatus which began in July 2012, when Leung Chun-ying became the chief executive. He was appointed to the Executive Council by Leung’s successor Carrie Lam.
He wrote that, if much of the financial activity of foreign money conducted in Hong Kong is denominated in the Hong Kong dollar, there could be monetary stability risks to the city.
“Users of our financial services may soon become concerned about that capacity, specifically the currency risk that they are assuming and the effectiveness of the hedging, if any, that they can undertake. These concerns may well constrain our further development as an international financial centre. And we ourselves, as we work to expand our role as an international financial centre, should also be alert to our increasing vulnerability to monetary stability.”
He said such dilemmas between maintaining the status of Hong Kong as an international financial centre, and maintaining monetary stability, should be addressed ahead of time.
The currency risk can be avoided if other currencies can be used, he added, such as the current Real Time Gross Settlement systems which renminbi, US dollar and euro could be used from years ago.
“As a start in addressing this monetary dilemma, it may be wise to make it conveniently possible for stocks listed in Hong Kong to be priced, traded and settled in the renminbi as well as in Hong Kong dollar,” he wrote.
“This move would have the added advantage of facilitating the further internationalization of the renminbi, in accordance with the declared policy objective of the Mainland. It would also enable banks in Hong Kong to manage their renminbi assets and liabilities more effectively.”