Ren Zhigang, a member of the Executive Council and former chairman of the Monetary Authority, attended the SAR government’s "14th Five-Year Plan Outline" presentation on Monday (23). He suggested that the capital market could be more convenient to trade in RMB, and the Hang Seng Index constituent stocks should be allowed to be traded in Hong Kong dollars and RMB. Quotation and trading of various currencies.
He pointed out that more and more international investors are willing to hold renminbi, so doing so will not only strengthen Hong Kong's business as a financial center, but also reduce the degree of hot money flowing into or out of the Hong Kong dollar and help stabilize the exchange rate of the Hong Kong dollar.
Ren Zhigang's proposal is based on the assumption that more and more international investors are willing to take exchange rate risks and hold RMB for a long time.
In the past, the U.S. dollar was regarded as a safe currency, because the pricing of all assets was often determined by the supply and demand of the U.S. dollar, while other currencies fluctuated due to the ups and downs of the U.S. dollar, which was regarded as a certain risk.
Although the US dollar is still the anchor of asset pricing, its function is gradually being affected by the internationalization of the renminbi driven by the rise of China.
More and more people want to hold RMB
It can be seen from some evidence that the RMB is in a relatively strong cycle against the US dollar.
First of all, China’s stable and high economic growth, coupled with its ability to effectively respond to unexpected events including the new crown epidemic, prove that China’s future development is guaranteed.
And as China's transactions with more regions have grown more widely, the opportunity for RMB to be used in international settlements has greatly increased.
Coupled with the political wrestling between China and the United States, China is more determined to promote the internationalization of the renminbi to weaken the hegemony of the U.S. dollar and as a sanction against the U.S. The potential appreciation of the renminbi against the U.S. dollar is greater than the devaluation opportunity.
Inferring from this point, Ren Zhigang believes that more and more international investors will be willing to take exchange rate risks to hold RMB. This is a fairly reasonable prediction.
However, there are only very few and not popular stocks in the Hong Kong stock market that are denominated in renminbi. International investors who are optimistic about the Chinese market have to face a dilemma at this time.
They want to invest in the mainland market and also want to hold renminbi assets, but if they want to buy and sell Chinese companies listed in Hong Kong, they have to convert their renminbi into Hong Kong dollars.
Some of them may therefore abandon the Hong Kong stock market and invest directly in the mainland stock market. Even if they stay in the Hong Kong market, they will have to face additional transaction costs.
Finding ways to reduce transaction costs is an important way to maintain the competitiveness of Hong Kong's financial market. Therefore, allowing direct trading of Hong Kong stocks in RMB can bring a lot of potential benefits.
Hong Kong dollar less affected by hot money
Moreover, doing so can also reduce the chance of the Hong Kong dollar being hit by capital hot money, stabilizing the exchange rate in disguise.
Now if the Hong Kong stock market is touted by international funds, it means that there will be hot money to buy the Hong Kong dollar in large quantities, which will cause the Hong Kong dollar to rise.
However, when the hot money flows away, the Hong Kong dollar will be sold off. In a disguised form, the Hong Kong dollar will face greater volatility due to the stock market conditions of Chinese companies.
For example, the Hong Kong dollar has been on the verge of a strong guarantee against the US dollar last year. Last year, the Hong Kong Monetary Authority had to sell the Hong Kong market many times in various markets to maintain exchange rate stability.
If it is promoted to trade Hong Kong stocks in RMB, it will kill two birds with one stone.
First, it can attract more investors to stay in the Hong Kong stock market and reduce their transaction costs. Second, it is not necessary for investors to enter the Hong Kong stock market through the Hong Kong dollar, which is likely to reduce the volatility caused by the large amount of hot money buying and selling the Hong Kong dollar.
This can effectively maintain the supply of Hong Kong dollars, stabilize local interest rates, and reduce the chance that the HKMA needs to stabilize the exchange rate in the open market.
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