How Hong Kong went from a yuan gateway to a complete currency ecosystem

In September, Hong Kong's Chief Executive John Lee Ka-chiu unveiled the city's first five-year plan, underscoring the strategic importance of promoting greater usage of the yuan beyond mainland China. Daisy Wu explores Hong Kong's transformation from an offshore yuan hub to a self-sustaining ecosystem in a four-part series on the globalisation of the currency.

While many of the 300,000-plus people crossing the mainland-Hong Kong border daily pay with yuan using smartphone-enabled turnstiles, the currency's treatment changes once it enters Hong Kong banks. Designated as offshore yuan or CNH, it trades at a market-driven exchange rate, distinct from mainland renminbi, which is subject to capital controls.

Hong Kong is the world's largest offshore yuan hub, handling approximately 76% of offshore yuan payments by value, according to Swift, the primary messaging system for international transactions. As of August, Hong Kong banks held about 1.1 trillion yuan (US$164.3 billion) in deposits, with Financial Secretary Paul Chan Mo-po pledging support for the offshore renminbi ecosystem in his 2024-25 budget speech. The government reaffirmed this commitment on September 16, coinciding with Lee's unveiling of the five-year plan.

Julia Leung Fung-yee, CEO of the Securities and Futures Commission, emphasizes the goal of bringing the offshore renminbi "to life" by developing investment platforms for equities, bonds, and wealth management to encourage long-term foreign holdings. Liquidity is crucial, with the People's Bank of China maintaining a standing swap line with the HKMA worth 800 billion yuan and regularly issuing central bank bills in Hong Kong.

In July, the HKMA expanded the quota of its RMB Business Facility, increasing yuan funding to banks from 200 billion to 500 billion yuan, with terms up to three years.

The government also plays a role as a primary issuer, recently pricing a 7.5 billion yuan five-year digital green bond at a 1.65% coupon, marking the largest tranche of a 20 billion yuan (US$2.54 billion) four-currency offering. Financial institutions in Hong Kong, such as Bank of China (Hong Kong), have added 14 yuan bonds with varying maturities and yields, along with 15 funds offering hedged and unhedged options.

Stock Connect and Wealth Management Connect, which enable cross-border trading and investment, have also bolstered Hong Kong's role in the yuan ecosystem. Analysts view Hong Kong as an essential intermediary in China's push for global yuan adoption, offering an internationally connected financial platform and a test bed for financial liberalisation.