March 15, 2010

Hong Kong Prepares for a Yuan World

Filed under: Uncategorized — ktetaichinh @ 9:08 pm
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HONG KONG—Last month, HSBC Holdings PLC moved its chief executive to Hong Kong with much fanfare. Now, the bank wants to finish the homecoming with a listing in Shanghai, a move that’s had some people in Hong Kong worried.

“Shanghai, along with Hong Kong, is the birthplace of HSBC,” says Gareth Hewett, a bank spokesman. “HSBC is keen to be among the first foreign firms to list on the Shanghai exchange. We are ready for when the authorities would like to do it, but it is their decision.

If successful, London-based HSBC—founded in 1865 as The Hongkong and Shanghai Banking Corp. Ltd. and a mainstay of Hong Kong’s benchmark stock index—could be the first international company to list on China’s domestic stock market, but it certainly wouldn’t be the last.


A parade of other big names, from Hong Kong-listed “red chip” China Mobile Ltd. and Bank of East Asia, also in Hong Kong, to exchange operators Nasdaq OMX Group Inc. and NYSE Euronext Inc., which don’t have Hong Kong listings, have expressed interest in listing on Shanghai’s stock exchange, which is currently open only to domestic investors and a tightly-regulated clutch of foreign institutions.

All this has heightened the sense of urgency among stock-exchange and government officials in Hong Kong, which has staked its prosperity on serving as a middleman between China and the rest of the world.

Last month, Hong Kong’s stock exchange claimed a coup by luring Russian aluminum giant UC Rusal. Despite Rusal’s lackluster market performance, the specter of a Shanghai international board raises a question: Where will the next big overseas company looking to tap Chinese investors choose to list?

To be sure, the Shanghai venue where HSBC wants to list, the planned “international board,” has been beset with delays. Mainland officials are dealing with a wide range of issues that could hold up progress for several more months.

Publicly, officials from the two sides insist there is nothing but friendliness between Hong Kong and Shanghai, citing a giant Chinese market with plenty of room for synergies.

Behind the scenes, though, as Shanghai officials move forward with ambitions to become a global financial center, Hong Kong is working overtime to fashion itself into an essential player in what is sure to be a lucrative business: yuan-denominated financial services.

Doing so before a fully ascendant Shanghai can corner the market would give Hong Kong an essential head start, while bolstering Hong Kong’s claim as Asia’s premier financial hub.

For months, government officials and regulators at the Hong Kong Monetary Authority and Securities and Futures Commission have been laying the regulatory foundation for a wide array of yuan services and products, from corporate bank accounts for trade settlements to corporate bonds denominated in yuan.

Local officials, meanwhile, have been quietly sounding out financial institutions on the idea of quoting Hong Kong shares in Chinese yuan and even settling transactions in the mainland’s currency—a step towards the possible trading of yuan-denominated shares in the city.

Creating separate products denominated in yuan and Hong Kong dollars is necessary because of China’s grip on flows of its currency across its borders. Beijing is keen to expand the use of the yuan around the world, motivated by a desire to reduce its dependency on the U.S. dollar and to encourage trading partners to use the yuan. Last year, China’s cabinet set plans to make Shanghai an international financial center by 2020 in order to boost its onshore financial services industry, increase its oversight of financial services and generate more local tax revenue.

“Shanghai is growing into a full-fledged international financial center, and we’re glad to see that happen,” says Julia Leung, Hong Kong’s undersecretary for financial services and the treasury and a key player in efforts to more closely bind Hong Kong and mainland China’s financial systems. At the same time, she adds, “we have to move very fast to capitalize on every pilot or experiment that they’re working on to liberalize their capital accounts further.”

That includes winning a role for Hong Kong in Beijing’s decision last July to allow companies to settle cross-border trade transactions in yuan. Earlier this month, the HKMA expanded the scope of that program to allow service transactions, like legal and medical bills, to be settled in yuan here.

Companies, including those not from the mainland, that are seeking project financing now can apply for yuan-denominated loans in Hong Kong, and can issue yuan-denominated bonds here to finance projects and trade transactions. (Any fundraising that would require remittance to mainland China would still require Beijing’s approval.)

The purpose of all these moves: to establish Hong Kong as a place where yuan deals can get done.

“We already have a good head start with the [yuan] business, from the banking and the lending to trade settlement and bond issuance,” Ms. Leung says. By building up the liquidity of yuan in the city, Hong Kong’s next move is to keep those yuan here by offering a wider range of investment products.

The jury is still out on whether this will all work. Shanghai’s potential is formidable; even without an international board, Shanghai is expected to surpass Hong Kong—last year’s global IPO leader—in new equity listings this year, according to estimates by Ernst & Young. In 2007, Shanghai beat out Hong Kong as well.

Stock-exchange operator Hong Kong Exchanges & Clearing Ltd., known as HKEx, is well aware of Shanghai’s growing pull.

“HKEx considers it is a natural trend for the mainland to introduce an international board because of the continued development of the mainland and its markets,” an HKEx spokeswoman said. “To win the continuous support from market users, including investors, HKEx will continue to improve its services and competitiveness.”


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