Beijing bolsters Hong Kong bond, gold trading in global renminbi push

[HONG KONG] Beijing and Hong Kong authorities unveiled a range of measures to bolster currency, bond and gold trading in Hong Kong, stepping up efforts to establish the city as a leading offshore renminbi centre amid heightened geopolitical tensions.

Hong Kong launched a central clearing system for gold on Tuesday (Jul 7) and also revived US dollar gold futures trading. And it is looking at introducing renminbi-denominated gold futures as it seeks to become a regional reserve hub for the precious metal.

The quota for the southbound Bond Connect programme, which allows mainland Chinese investors to buy bonds in Hong Kong more easily, would be expanded to 800 billion yuan (US$117.8 billion) from 500 billion yuan.

Beijing also expanded a renminbi-liquidity facility with the Hong Kong central bank to 500 billion yuan from 200 billion yuan in an effort to give the Hong Kong Monetary Authority (HKMA) a deeper offshore pool.

Hong Kong will benefit from growing investor needs to diversify their assets as well as China’s efforts to promote the renminbi’s global use, the People’s Bank of China (PBOC) governor Pan Gongsheng told an investment conference in Hong Kong on Tuesday.

As the global monetary system becomes more multi-polar, “global demand for the renminbi is expanding beyond trade settlement into other areas including investment, financing, pricing and reserve holdings”, he added.

“These initiatives are a positive step towards strengthening financial market connectivity, attracting international capital and enhancing Hong Kong’s unique role as the gateway between China and global markets,” said Zhou Hao, chief economist at Guotai Junan International, in a research note.

Tax incentives

The new gold clearing system will lay the foundation for Hong Kong to build a comprehensive trading ecosystem, the city’s Chief Executive John Lee told the investment conference.

“If gold is the world’s safe haven, then Hong Kong will be its safe harbour,” Lee said, adding that there would be tax incentives for gold trading and settlements.

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The city is seeking to grow its total gold storage capacity by more than 10 times to over 2,000 tonnes by 2030.

Hong Kong, in competition with Singapore, is seeking to capitalise on rising global interest in gold as investors seek alternatives to the US dollar due to market and geopolitical uncertainties.

Hong Kong also launched a “Delivery Connect” programme with the Shanghai Gold Exchange to facilitate cross-border gold settlements, Lee added.

Promoting secondary trading

Julia Leung, chief ​executive officer of Hong Kong’s Securities and Futures Commission (SFC), said that the city will build a new electronic platform – developed with the PBOC’s trading unit – to improve efficiency in bond and foreign exchange trading in the financial hub.

The move signals a major push to promote secondary trading in markets, she added, as opposed to Hong Kong’s previous efforts to focus solely on primary issuances.

“Chinese bonds, with their relative stability and low volatility, offer distinct diversification advantages,” the PBOC’s Pan said, adding that with lower yuan financing costs, the market is faced with an opportunity for development.

With the new measures, the offshore renminbi “dim sum” bond market is set to become an increasingly important bridge between onshore Chinese investors and global issuers, Vikas Gupta, JPMorgan’s head of trading, Asia currencies and emerging markets, told Reuters.

Pan said that China would further deploy its foreign exchange reserves into Hong Kong’s financial markets.

The city is also adding tools to hedge risks in renminbi holdings, including allowing some onshore bonds under Bond Connect to be used as collateral.

Contracts on Hong Kong’s derivatives platform Swap Connect surged 50 per cent in the second quarter from a year earlier, according to the SFC’s Leung, which “indicates robust demand from foreign investors for such products”. REUTERS