What is the role of Hong Kong in the second half of RMB internationalization with "delegation, regulation and service"?

Mainland financial regulators act frequently.

First, the China Securities Regulatory Commission "released" VIE-structured enterprises, and the supervision of overseas listing of Chinese stocks finally came into effect; later, the People's Bank of China and the National Development and Reform Commission "relaxed" the overseas bond issuance system of domestic financial institutions, and onshore companies raised funds. further widen.

The heads of the two Chinese financial regulators invariably mentioned the reform of “delegating power, delegating power, delegating power, delegating power, strengthening supervision and optimizing services) at a press conference earlier, signaling the reform of the financial market.

With the deepening of the reform and opening up of the onshore financial market, the internationalization of the RMB has begun the "second half".

What role can Hong Kong's offshore market play in the new cycle?

Dynamic reforms try to open up

the offshore market with capital into a unique international path

In the "Impossible Triangle" of independent monetary policy, exchange rate stability and free capital flow, the current or former international currencies such as the US dollar, the euro, and the British pound, the monetary authorities' orientation is independent monetary policy and free capital flow, instead of giving up stable exchange rate.

To a certain extent, "free convertibility of capital" has been regarded as the only way for a national currency to become an international currency.

However, for a long time in its history, China has been oriented towards the first two - an independent monetary policy cannot be given up, and a relatively stable exchange rate is also very important in order to ensure the safety of the "economic engine" of "trade".

Therefore, the RMB current account and capital account were strictly controlled in the past.

In 2009, with the introduction of the "Cross-border Trade Settlement Measures", the RMB current account restrictions were first broken, and the curtain of RMB internationalization was gradually opened.

Then came the "8.11 exchange rate reform" in 2015. The central bank removed the 2% limit on the exchange rate fluctuation of the RMB, introduced a "countercyclical factor", and the exchange rate opened a bilateral floating model.

In 2009, with the introduction of the "Cross-border Trade Settlement Measures", the RMB current account restrictions were first broken, and the curtain of RMB internationalization was gradually opened.

(Reuters)

It can be said that in the initial stage of RMB internationalization, China tried dynamic attempts in free flow of capital and stable exchange rate, and it has also gone through many highs and lows.

However, China is still a long way from achieving full currency convertibility.

The main bottleneck is whether capital projects are open or not.

"China is currently in an 'embarrassing situation'." Li Linxiang, professor of the Department of Economics and Director of the Economic Development Research Center of the Hong Kong University of Science and Technology Business School, analyzed in the media column: On the one hand, China is the world's second largest economy and the largest trading nation , and will soon become the largest economy, but on the other hand, China is still an emerging economy, which means that its financial and legal system is still immature compared to the more advanced systems in the West.

With the financial and legal systems still immature, if China fully opens up the free convertibility of capital accounts, it will face capital shocks from mature economies, or cause systemic risks to the economy.

Therefore, in the initial stages of RMB internationalization, China adopted a "unique approach".

Li Linxiang pointed out that the Chinese government has adopted the strategy of "one currency, two markets": establishing an offshore market and "setting up a firewall" between the onshore and offshore markets. The renminbi is fully convertible in the offshore market. Convertible.

Therefore, the offshore market represented by Hong Kong plays a unique role. For example, the central government cooperates with Hong Kong to establish investment channels such as Shanghai-Shenzhen-Hong Kong Stock Connect, Bond Connect, QDII, QFII, and Cross-border Wealth Management Connect, and test the opening of onshore capital projects. .

Bank of China (Hong Kong) is the world's first offshore RMB clearing bank.

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Onshore financial reform and opening -up

open the "second half" of RMB internationalization

Of course, relying on Hong Kong, Singapore, London and other offshore markets with mature financial and legal systems, China's currency internationalization has indeed taken a different path.

However, returning to the core issue of capital account opening, the offshore market alone cannot fundamentally solve the problem of "free convertibility". Capital controls in the onshore market have become an obstacle to the next step in the internationalization of the RMB.

"After joining the SDR (Special Drawing Rights Basket of the International Monetary Fund), the internationalization of the RMB has entered a "home-driven period". The concept is to rely more on the opening of the mainland's financial market to promote internationalization." Bank of China (Hong Kong) Chief Economist E Zhihuan emphasized in an earlier interview with Hong Kong 01: "With one capital account, the internationalization of the RMB can go one step further."

E Zhihuan, Chief Economist of Bank of China (Hong Kong), emphasized: "With one capital account, the internationalization of the renminbi can go one step further."

A similar view is held by Li Linxiang, whose new book, “One Currency, Two Markets: China’s Attempts to Internationalize the Renminbi,” includes one of his empirical studies in Chapter 8.

Li used the gravity model and added variables such as the degree of financial openness, trade balance and GDP of various countries to predict the future payment ratio of RMB in the international monetary system.

He concluded that "to promote the RMB as an international currency, China's financial development and capital account opening are more important than China's huge GDP".

In other words, the key to continued RMB internationalization lies in the "opening of the capital account", that is, the degree of openness of the onshore financial market.

To open up the onshore financial market, it must be based on the maturity of China's financial and legal systems.

In "Renminbi Strategy: How China Constructs an International Currency," Paula Subaki, a professor at the Department of International Economics at the Queen Mary University of London's Global Policy Institute, pointed out that China adopts a policy of "financial repression."

Specifically, China's household savings rate is high, but financial institutions offer few tools, and banks' deposit rates are relatively low, and savers cannot move money abroad without an open capital account. make an investment.

As a result, a financial system dominated by state-owned banks can provide cheap loans to state-owned enterprises.

Paula Subaki, a professor of international economics at the Queen Mary University of London's Global Policy Institute, pointed out that China has adopted a policy of "financial repression".

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It can be said that China's financial system and legal system are relatively backward, still at the level of emerging countries.

For the Chinese government, it must reform the financial system dominated by state-owned enterprises and state-owned banks before it can relax the policy of "financial repression" and promote the opening of the capital account.

Otherwise, there will be capital flight, which will hit China's real economy.

Therefore, China's onshore financial market is "reformed" first and then "opened", which has become a necessary path for the "second half" of RMB internationalization.

The recent reform of "delegating power, delegating control and serving" in the financial field is the signal for the "second half" to start.

The dividends and responsibilities of the "testing ground" of Hong Kong's "testing ground" in the

financial sector

The so-called "decentralization and management services" is called "simplifying administration and delegating powers, combining decentralization and management, and optimizing services".

"Delegation" refers to the central government's delegation of administrative powers, reducing administrative powers without legal basis and legal authorization, and clarifying administrative powers that are repeatedly managed by multiple departments.

"Management" means that government departments should innovate and strengthen supervision functions, and use new technologies and new systems to strengthen the innovation of supervision systems.

"Serving", transforming government functions, reducing government intervention in the market, pushing market matters to the market for decisions, reducing excessive administrative approvals and other behaviors for market entities, reducing the administrative cost of market operations for market entities, and promoting the vitality of market entities and innovation capabilities.

As early as 2015, it was proposed by the State Council in a telephone work conference.

Subsequently, the local governments of various provinces and cities in China started the reform of "delegating power, delegating power, delegating power and improving services", which is mainly reflected in the simplification of administrative procedures for people's livelihood.

From the past when the masses were "played" (referring to various departments shirk their responsibilities) in the past, to the later "only one run" (referring to the need to go to multiple departments to submit materials for handling affairs), the transition in the past is the reform of "delegating power, regulating services" 's results.

On October 21, 2021, the plenary meeting of the Coordination Group of the State Council to promote the transformation of government functions and the reform of "delegating power, delegating power and improving services" was held in Beijing.

(Photo by Xinhua News Agency reporter Rao Aimin)

In 2020, Premier Li Keqiang of the State Council proposed in the State Council's government work report that the reform of "delegating power, delegating power, improving management and improving services" should be "deeply advanced".

At the end of 2021, the reform of "delegating power, delegating power, regulating services" and deepening into the financial sector.

The heads of the China Securities Regulatory Commission and the People's Bank of China both mentioned in the introduction of the policy documents that the policy was introduced in order to meet the State Council's requirement to deepen the reform of "delegating power, delegating power and improving services".

As the country's international financial center, Hong Kong's offshore market will of course be deeply affected by China's onshore financial reforms.

Let’s take a look at the impact of the “delegation, regulation and service” reform on Hong Kong and Hong Kong’s role in China’s financial reform from the policy documents of the two Chinese financial regulators.

The "Regulations of the State Council on the Administration of the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment)" and the "Administrative Measures for the Recordation of Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment)" issued by the CSRC are mainly aimed at China's The upsurge of overseas listing of enterprises, especially the VIE structure enterprises that are closely watched by the market.

In the past, China had acquiesced in allowing VIE companies to go public until Didi Chuxing hit a wall in the U.S. listing.

The announcement of the draft policy is a reform of the official clarification of overseas listing rules.

The China Securities Regulatory Commission issued the "Regulations of the State Council on the Administration of the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment)" and the "Administrative Measures for the Recordation of Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment)".

In this draft, all listings visible in the market are included, including IPOs, direct listings, secondary listings, dual listings, backdoor listings, special purpose acquisition companies (SPACs), and more.

As long as "domestic enterprises" are involved, the issuance or listing of their assets and securities is basically within the scope of the new supervision. However, the central government has not "banned" the listing of VIE entities, and clearly does not review whether the enterprises meet the conditions for issuance and listing in overseas listing places. It does not engage in disguised approval, as long as it meets the "recording" requirements, it can go public overseas, reflecting the reform characteristics of "decentralization, regulation and service".

The announcement of the draft means that the supervision of the overseas listing of Chinese concept stocks "falls to the ground". It is naturally a pleasure for Hong Kong's financial market, which has relied on the boom in the return of Chinese concept stocks in recent years.

Over the past year, Hong Kong's stock market has also fallen to freezing point due to regulatory influence.

If the filing system is implemented in the future, and the Chinese concept stocks will be reviewed by Chinese regulatory agencies before listing, it will be equivalent to adding a "firewall", and the supervision will change from dark to light, which will reduce the risk of overseas investors in disguise, and the Hong Kong market will be more trading. to be active.

On the other hand, affected by events such as Ruixing’s thunderstorm, Ant Financial’s listing on the rocks, Didi Chuxing’s delisting and other events, international investors currently lack confidence in Chinese concept stocks, and Hong Kong should also play its responsibilities as China’s international financial center. Assist in the promotion of Chinese companies going overseas, create more financial instruments related to Chinese concept stocks, and build the confidence of overseas investors in Chinese companies.

Bond Connect and Cross-border Wealth Management Connect passed this year are all systems to facilitate cross-border capital exchanges between the two places.

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The optimization of the bond issuance system by domestic financial institutions in the People's Bank of China and the reform of the People's Bank of China is the deepening of the opening up of China's official financial system, reflecting Hong Kong's role as a "testing ground".

"The offshore RMB market was built for and modelled on Hong Kong. The Chinese government can use Hong Kong's experiment to gradually and controllably open up China's financial market," Subaki wrote in the book.

In 2007, the People's Bank of China and the National Development and Reform Commission jointly issued the "Interim Measures for the Administration of the Issuance of RMB Bonds by Domestic Financial Institutions in the Hong Kong Special Administrative Region", thus opening the dim sum bond (offshore RMB bond) market in Hong Kong.

Today, bonds are still the main product type of RMB securities listed on the Hong Kong financial market.

According to the Hong Kong Stock Exchange, as of the end of 2020, the number of renminbi debt securities listed in Hong Kong was 75, accounting for more than 60% of the number of renminbi securities products (115) on the Hong Kong Stock Exchange.

As of the first half of 2021, domestic financial institutions have issued a total of RMB 147.8 billion in RMB bonds in Hong Kong, broadening the channels for the use of offshore RMB.

Over the past 15 years, Hong Kong's "experiment" in the dim sum bond market has been stable and has not had any impact on the onshore market.

Therefore, the central government is naturally willing to loosen restrictions and promote further financial opening.

According to the person in charge of the relevant departments of the People's Bank of China and the National Development and Reform Commission, under the framework of the "Interim Measures", if domestic financial institutions issue RMB bonds in Hong Kong, the People's Bank of China, together with the National Development and Reform Commission, shall review their qualifications and issuance scale, and report them to the State Council.

After the abolition of the "Interim Measures", domestic financial institutions' issuance of bonds in principal and foreign currencies in Hong Kong and overseas countries will not be affected, and the procedures will be simpler and optimized, and the specific issuance area and issuance window can be independently selected within the approved quota.

In short, the procedures for domestic institutions to issue bonds in Hong Kong will be simpler, and it is believed that the offshore RMB bond market in Hong Kong will be activated.

Further thinking, Hong Kong can communicate with the central government to expand its "experimental" role, and try to implement "offshore RMB" pricing and trading in other securities products other than bonds, and use the mature financial and legal system of the offshore market as the onshore financial reform. Opening up provides experience and experiments, and promotes the "second half" of RMB internationalization to go deeper and wider.

Hong Kong can communicate with the central government to expand its "experimental" role, and pilot the pricing and trading of "offshore RMB" in other securities products other than bonds.

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