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Eddie Yue: Hong Kong as an international financial center – the China factor - page 2 / 4





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opportunities to the asset management industry, especially given the fact that the Mainland economy is the single largest provider of savings in the world.

Currently, outward portfolio investment (OPI) from the Mainland is only around 5% of its GDP, still far below 57% for East Asia, 42% for the US and over 100% for the UK. Our in- house research findings show that an economy’s portfolio investment outflows as a percentage of GDP tend to grow along with the level of economic development measured by per capita GDP.

So, given the huge potential outward portfolio investments from Mainland China, how will they be allocated across different financial markets? Our researchers have studied this particular subject in depth and found that the home bias is still very much there, i.e. the closer the potential investment destination to Mainland China, the more OPIs it will receive from Mainland China. As such, Hong Kong is likely to be one of the key destinations of Mainland’s OPIs and the amount of those OPIs Hong Kong will receive will increase as China’s GDP grows. Apart from being the final destination for these investments, Hong Kong can also act as an ideal launch platform for these investment flows to reach other major global markets.

Since the introduction of the QDII scheme, about US$67 billion worth of investment quotas have been granted up to September 2010. It is likely that a significant portion of these moneys is managed out of Hong Kong. In fact, over 40 Mainland companies providing fund management, securities and futures, insurance, and other services have already established a presence in Hong Kong to manage the funds flowing out of the Mainland and engage in fund advisory businesses.

We expect the process of financial liberalisation in Mainland China to be a gradual and controllable one, as it has always been. It is however important to note that this process has begun and Hong Kong is bound to be a key destination as well as the management hub for the expected gradual increase in portfolio flows from Mainland China. This is a trend that financial services providers should not ignore in their business planning process.

The wider external use of the RMB Now, let me move on to the second important trend: the wider external use of the RMB.

Since the global financial crisis, Mainland China has taken steps to promote a greater use of RMB outside the Mainland. The rationale behind this policy move is easily understandable. At present, much of the cross-border trade and investment between the Mainland and other jurisdictions are conducted in US dollars. As the Mainland continues to expand its international trade and investment, and becomes more economically integrated with the rest of the world, Chinese traders, investors and financial institutions will face growing foreign exchange risk if they continue to rely on the US dollar. Thus, it is a natural development for Mainland China to allow a wider use of RMB in its cross-border trade and investment.

From Hong Kong’s perspective, this policy move presents unprecedented opportunities to us, as we can leverage on our strengths as an IFC and our unique position as a gateway between China and the world to provide a premier testing ground for offshore RMB activities.

Offshore RMB business has been conducted in Hong Kong since 2004. While the scope of RMB business was limited to retail banking initially, it has been expanded substantially to cover bond issuance, trade settlement, wealth management and further to ODI settlement in January this year. These developments have built a solid foundation for developing Hong Kong into an offshore RMB center. Let me briefly summarise these developments in three dimensions.

The first dimension is RMB financing. Hong Kong is the first place outside the Mainland that has developed an RMB bond market. So far, 34 RMB bonds have been launched in Hong Kong with a total issuance size of 80 billion yuan. The issuer base was expanded from only


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