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)