China takes next step in currency globalization, with some HK stocks
priced in yuan
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[June 16, 2023] By
Samuel Shen and Georgina Lee
SHANGHAI/HONG KONG (Reuters) - China's gradual internationalisation of
its currency will shift to its next leg on Monday when about two dozen
Chinese companies start trading in their home currency in Hong Kong's
stock market.
Hong Kong stocks such as Alibaba and Tencent are among the 24 stocks
which will be priced and traded in both yuan and the Hong Kong dollar
under the Dual Counter Model on the Hong Kong stock exchange (HKEX) from
Monday.
The scheme is targeting overseas investors with yuan holdings initially,
but will later include mainland investors via the Hong Kong-China Stock
Connect link-up later. Offshore yuan deposits in Hong Kong alone are
estimated at some 833 billion yuan ($117 billion).
Fund managers say the step reflects Beijing's desire to expand the use
of yuan outside China and provide another avenue for yuan-denominated
investment, thus reducing the risk of capital outflows chasing higher
yielding currencies such as the U.S. dollar.
"China is pushing yuan internationalisation to avert geopolitical risks
and reduce reliance on the dollar, and for that purpose, you need wider
use of the Chinese currency," said Ding Wenjie, strategist of Global
Capital Investment at China Asset Management Co (ChinaAMC).
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Ding said the scheme is a major milestone and expects the model to be
expanded in future, beyond stocks to bonds and even alternative assets,
boosting overseas asset pools denominated in yuan.
The initiative comes amid a steady stream of bilateral yuan-denominated
deals China has struck with trading partners, from Chinese oil purchases
in the Middle East, to commodities trade with partners from Brazil to
Russia. Beijing has retained close ties with Moscow despite the invasion
of Ukraine.
The U.S. dollar remains the dominant global currency, accounting for 42%
of global payments. The yuan's share is just 2.29%, but is up from 1.95%
two years ago.
A significant breakthrough in China's efforts to promote use of the yuan
came this month, when Pakistan paid for its first
government-to-government import of discounted Russian crude oil in yuan.
"When a currency is internationalised, it's not only used in trade,
physical goods, or services. It also has to be parked in investment
vehicles," said Dong Chen, Head of Asia Macroeconomic Research at Pictet
Wealth Management.
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Chinese yuan banknotes are seen in this
illustration picture taken April 25, 2022. REUTERS/Florence
Lo/Illustration
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For foreign investors with yuan holdings, "buying shares in Hong
Kong without really going into mainland China will be a much, much
easier way to park your holdings of this currency," he said.
YUAN INCENTIVES
Under the dual counter arrangement, investors can choose to trade a
stock either using Hong Kong dollars via the HKD counter, or yuan
via the RMB counter, with market makers providing liquidity and
minimizing price discrepancies.
Most of the first batch of stocks eligible for yuan trading - which
include AIA Group, Sun Hung Kai Properties and Hang Seng Bank Ltd -
are not listed in China.
Fund managers expect a lukewarm interest in the yuan counters
initially, given near-term risks including a weakening yuan and
wobbly stocks as China's economy struggles. But they expect demand
to pick up over time.
"Mainland investors, including mutual fund companies like us, have
genuine incentives to trade Hong Kong stocks in yuan," said Ding of
ChinaAMC.
"Our fund returns and dividends are priced in yuan, so using the RMB
counter can remove forex exchange costs, and shield us from currency
volatility."
There are many other reasons to trade in yuan, said David Friedland,
Asia Pacific managing director at Interactive Brokers, which offers
yuan-trading services.
"There's lot of political uncertainty these days so you may want to
hold yuan rather than U.S. dollars, or the Hong Kong dollar, which
is pegged to the U.S. dollar."
($1 = 7.8217 Hong Kong dollars)
(Reporting by Samuel Shen and Georgina Lee; Editing by Vidya
Ranganathan and Kim Coghill)
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