Such deposits are accumulating at an average of RMB 50bn a month and are largely the result of trade settlement, suggesting that these deposits will reach RMB 1,000bn early next year.
As part of longer-term plans to allow the Chinese currency to be freely convertible for both the trade and capital accounts, China aims to establish Hong Kong as the offshore centre for RMB trade settlement and investment. Currently RMB deposits account for only 7 per cent of total deposits in Hong Kong and there is widespread expectation that this will grow to 20 per cent in the next few years as the offshore currency market develops and more investment opportunities become available as part of the liberalization strategy.
The market for offshore RMB-denominated bonds is growing quickly. Although this market has not kept pace with the accumulation of RMB deposits, it is currently approaching RMB 100bn with the period of rapid development only beginning last year, since the announcements concerning the lifting of key restrictions limiting ownership of the currency offshore. Prior to last July, the amount that a company or fund manager could convert in the offshore market, commonly referred to as CNH, was severely limited.
Since the liberalization mutual funds, fund managers and other institutions have unrestricted access to the interbank market in Hong Kong. As a result there has been a flurry of activity and new bond issuance as financial institutions and companies have sought to take advantage of the significantly lower funding costs available in the offshore market.
In April the Hong Kong stock exchange listed its first RMB-denominated initial public offering, widely expected to be the curtain raiser on a newly emerging segment of the equity market.
Presently Chinese equities typically represent less than 3 per cent of a global benchmark and yet by market capitalization they account for about 10 per cent of the global equity market. The expectation is that as the currency internationalizes, and as it moves towards being freely convertible, then both the currency and RMB assets including equities and bonds will become more widely owned outside of China.
The mainland central bank, the People Bank of China, is encouraging the development of Hong Kong as a centre for RMB investment. In April, through the Bank of China, it lowered RMB deposit rates available in Hong Kong, encouraging investors to consider alternatives to simply keeping money on deposit which ultimately was being parked with the central bank
