In the economic and trade cooperation between Guangdong and Hong Kong, financial cooperation is an extremely important link, but the high entry threshold of the mainland banking industry has discouraged small and medium-sized banks in Hong Kong. The establishment of offshore RMB trading center facilitates Hong Kong banks to carry out RMB business locally, which is not subject to the control of the central bank. It is expected that the huge business volume will bring considerable profits to Hong Kong banks.
As the RMB is not fully convertible under capital account, the transactions of RMB against USD, HKD, JPY and EUR in Shanghai foreign exchange market are settled in USD instead of RMB. After the establishment of offshore RMB trading market in Hong Kong, it will be convenient for investors to hedge the risk of exchange rate changes through non-deliverable forward contracts, and Hong Kong banks will also benefit from it. The non-convertibility of RMB restricts the capital flow between China and potential overseas creditors, borrowers and customers, and has long been regarded as an obstacle to doing business in China.
Hong Kong has been looking forward to trading RMB in Hong Kong to maintain its position as an Asian financial center. Hong Kong has the advantage of becoming the first offshore RMB market in China. Hong Kong has close ties with new york, London and other international financial markets, as well as with the mainland financial markets. In terms of management, the Hong Kong market is separated from the mainland and is an excellent experimental area. The Bank of China Hong Kong Limited is the third largest bank in Hong Kong by market value and provides corresponding services as a RMB settlement bank. According to industry insiders, the first step in establishing a RMB exchange center in Hong Kong may be to allow banks in Hong Kong to accept RMB storage business before approving other banking businesses. Even if only part of the RMB is freely convertible, it will be a big plus for local banks in Hong Kong, because most banks in Hong Kong are small and medium-sized banks, so it is difficult to meet the access requirements and enter the huge mainland market. It is a challenge for foreign banks, including Hong Kong-funded banks, how to attract the funds needed to carry out RMB loan business in Chinese mainland. Raising RMB in Hong Kong will help alleviate their problems in this respect.
In fact, RMB overseas transactions have been widely circulated in Hong Kong through small-scale exchange points. It is reported that these exchanged RMB often return to the mainland through illegal money laundering channels, and the establishment of offshore trading centers is conducive to strengthening anti-money laundering efforts. However, the central bank still has some concerns about establishing an offshore RMB market. According to international practice, the offshore financial market is usually not under the jurisdiction of the financial authorities of the country where the transaction currency is located. Chinese mainland's interest rate has not been marketized, and the difference between it and Hongkong's market interest rate may bring risks, lead to large-scale arbitrage and shake the stability of RMB. Developing RMB business in Hong Kong will make RMB more vulnerable to market fluctuations.
Since banks operating offshore financial markets do not need to deposit reserves with the central bank and are not bound by the statutory reserve ratio, a small increase in the reserves of offshore banks can create a large number of loans, and their money creation multiplier is higher than that of mainland banks. Therefore, it can provide customers with cheaper loan interest rates. Therefore, it is not ruled out that mainland banks will try their best to buy RMB loans in Hong Kong, and there may be a large number of international RMB liquid assets, which will make it difficult for the central bank to manage credit and lead to some unpredictable consequences. There is also a view that the growth of offshore dollar deposits is related to global inflation in 1970s, and offshore money contributed to inflation.
At the same time, the expansion of offshore banks reduces the fragmentation of financial markets in various countries, and independent national currencies can escape domestic monetary tightening through offshore financial activities, which leads to uncontrolled currency flow, thus reducing the effect of monetary policy regulation and control, and further affecting the whole macro-economy. In the United States, overnight Eurodollar is included in M2 of money supply, and long-term Eurodollar is included in M3. This is a remarkable comment on the influence of offshore finance on monetary policy, so the central bank's concern is not difficult to understand. Therefore, some insiders said that the offshore RMB market in Hong Kong will be strictly regulated, including prohibiting RMB from entering its mainland business, and will be required to trade only with individual investors, and the deposit of each customer shall not exceed 20,000 RMB. It is conceivable that the central bank will not let itself go in the offshore RMB market.