HONG KONG PUSHES THE OFFSHORE RMB ENVELOPE

UNCLAS SECTION 01 OF 02 HONG KONG 000266 SENSITIVE SIPDIS STATE FOR E, EAP/CM AND EEB/IFD/OMA E.O. 12958: N/A TAGS: EFIN ECON HK CH SUBJECT: HONG KONG PUSHES THE OFFSHORE RMB ENVELOPE REF: A. HONG KONG 212 ¶B. 09 HONG KONG 1667 ¶C. 09 HONG KONG 1280 ¶D. 09 HONG KONG 1104 ¶1. Summary: The Hong Kong Monetary Authority (HKMA) issued a circular February 11 that effectively simplifies and expands the use of Renminbi (RMB) in Hong Kong for both cross-border and domestic transactions. Foreign companies, including U.S. companies, are explicitly allowed to conduct trade settlement for both goods and services trade, can borrow in RMB from authorized Hong Kong banks and even issue RMB bonds in Hong Kong. Hong Kong banks will no longer need to verify the eligibility of Mainland counterparties to conduct cross-border transactions. The volume of RMB transactions in Hong Kong grew dramatically in December and January; these "clarifications" should accelerate the use of RMB in Hong Kong even further. End Summary. ¶2. (U) The HKMA's February 11 circular "clarified" the supervisory principles and operational arrangements for RMB business in Hong Kong. While the HKMA was careful not to publicize these "clarifications" as expansions of the scope of RMB use in Hong Kong (going so far as to issue the notice under the "guidelines" rather than the "press announcements" section of its website),the practical effect will be to broaden the number of transactions where RMB can be used and simplify the use of RMB for banks in Hong Kong. The HKMA circular allows any authorized financial institution in Hong Kong to open RMB deposit accounts for any corporate customers to conduct trade settlement transactions in Hong Kong. This clarification allows foreign, including U.S., corporations with Hong Kong bank accounts to settle trade with approved Mainland counterparts in RMB. They will also be allowed to use RMB checking and credit card services. It also effectively expands the scope of RMB trade settlement in Hong Kong to include trade in services as well as goods. ¶3. (U) Authorized Hong Kong banks are also allowed to lend RMB to interested corporate customers. These RMB loans will no longer be limited just to trade finance for specific transactions, but can also be used to fund approved projects in mainland China. RMB bonds, previously limited to selected financial institutions, will now be an option for all Hong Kong corporates, subject to their eligibility under Hong Kong's normal bond issuance regulations. However, they will not be allowed to directly remit the RMB funds raised back to China, nor to use the funds to invest in Chinese stocks, bonds, or property. ========================================= Simplifying RMB Transactions for HK Banks ========================================= ¶4. (SBU) Undersecretary for Financial Services and the Treasury Julia Leung previewed these moves for U.S. officials on January 27 (ref A). In discussions February 12, she expected the most important aspect of the HKMA circular was the announcement that Mainland authorities and banks are responsible for verifying whether transactions are in compliance with Mainland regulations. Previously, Hong Kong banks were required to verify whether Chinese counterparties were on a list of institutions authorized to conduct cross-border RMB transactions, a time consuming and often difficult process. Any RMB transaction involving a Mainland counterparty can now be assumed to have approval from the relevant Chinese authorities, said Leung. ============================== RMB Transactions Growing in HK ============================== ¶5. (SBU) HKMA External Head Carmen Chu noted that the circular only clarified approved transactions under the existing framework and in some areas simply acknowledged transactions that were already taking place. RMB services trade settlement had already been taking place in Guangdong province for several months, she said. In other areas, the "clarifications" should allow for more rapid development of cross-border RMB transactions that have accelerated in recent months. RMB trade settlement got off to a relatively modest start after its announcement in July 2009 (ref D) and had resulted in only about RMB 490 million (US$72 million) in transactions through the end of November. However, December and January figures showed a sharp increase in cross-border RMB transactions to RMB 1.3 billion (US$191 million) in December alone, said Chu. January figures have not yet been released, but Chu estimated based on available information that the January number would be even higher. HONG KONG 00000266 002 OF 002 ¶6. (SBU) Both Chu and Leung noted press speculation that the Chinese Ministry of Finance was considering issuing another tranche of RMB-denominated bonds in Hong Kong, following on the oversubscribed launch of RMB 6 billion in sovereign bonds in September 2009. While neither was willing to offer a prediction, both agreed that another Chinese RMB bond issuance would be a welcome boost for Hong Kong's developing debt market. MARUT