With the opening of its investment promotion office in Shanghai
last week, Hong Kong is getting serious about enticing mainland
enterprises to open offices in the special administrative region as
a base for their overseas expansion.
The direct benefits, in terms of capital inflow and job
creation, that can be derived from these investments would be small
by nature. But an increased presence of mainland enterprises could
significantly strengthen Hong Kong's position as the mainland's
international financial center.
Reports that the central government is leaning toward further
consolidating Hong Kong's international role while promoting
Shanghai's national status have greatly raised expectations in Hong
Kong's financial community for the rapid expansion of renminbi
business. This business is presently restricted primarily to bank
deposits taking.
In a speech last year, Hong Kong monetary chief Joseph Yam said
that the free market environment of Hong Kong offers "the ideal
laboratory" for mainland authorities to experiment in specific
areas of financial activity, including currency convertibility.
Hong Kong's highly internationalized financial system could also
provide an effective channel for mainland enterprises to tap global
markets for funds to help finance expansion. In fact, quite a few
mainland enterprises have already raised new capital in initial
public offerings (IPOs) in the Hong Kong stock market.
In the past, most of the IPOs were issued by large State-owned
enterprises. In 1996, for instance, 68 of the 71 mainland companies
listed in Hong Kong were State-owned. By 2006, however, State-owned
enterprises comprised just a little more than 50 percent of the 367
mainland listed companies on the Hong Kong exchange. The rest were
privately owned.
This is seen as a most encouraging trend because privately owned
enterprises are usually more innovative in thinking and nimble in
action. They'll be able to take advantage of the benefits offered
by Hong Kong's market-driven business and financial
environment.
They are the companies that Hong Kong should make extra efforts
to attract because they are the potential users of any new renminbi
services Hong Kong may introduce.
A key component of Hong Kong's strategy to expand its role as an
international financial center is to enhance the capability of the
financial system to handle renminbi transactions, with a view to
facilitating Hong Kong as the mainland's financial intermediary.
Hong Kong would be the place to conduct experiments in financial
liberalization and the management of associated risks.
The strategy has been put into motion with the discussion to
allow selected mainland enterprises to raise long-term capital by
issuing renminbi-denominated bonds in Hong Kong. There has also
been a proposal to use the renminbi to pay for mainland imports for
consumption in Hong Kong.
As monetary chief Yam noted, the renminbi, as the currency of
one of the world's largest economies, will inevitably become a
currency of payment for international trade in goods and services.
It is possible that the Chinese currency, when it becomes fully
convertible, will be widely adopted as a reserve currency like the
US dollar, the euro and, to a lesser extent, the Japanese yen.
As an international financial center, Hong Kong must develop its
capability to handle renminbi financial transactions, Yam
urged.
It is therefore important to establish mechanisms to connect the
financial infrastructures (the payment, clearing, settlement and
custodial systems) of the mainland and Hong Kong to facilitate the
orderly flow of money and financial instruments across the two
financial systems.
(China Daily March 20, 2007)