Shanghai yuan move poses challenge to HK supremacy

SHANGHAI — Plans to adopt a convertible yuan in Shanghai’s new free trade zone are posing the biggest challenge yet to Hong Kong’s role as the global trading hub in the Chinese currency.

“Hong Kong’s competitiveness will be harmed with Shanghai having the capability to deal with offshore yuan. Hong Kong may become another Chicago, which was left behind as New York emerged as the United States financial centre,” said Sun Hung Kai Forex strategist Bruce Yam.

Transactions exchanging yuan for US dollars more than tripled in Hong Kong in the past three years to account for 17.7 per cent of the city’s US$275 billion (S$344.4 billion) average daily foreign exchange turnover, more than any other currency pair, the Bank for International Settlements said earlier this month. The deals helped push Hong Kong’s ranking in global currency trading to fifth this year from sixth in 2010, it said, with the top four being the United Kingdom, US, Singapore and Japan.

Shanghai’s free trade zone, occupying 29 sq km of land in China’s biggest commercial hub, is scheduled to open on Sunday. It will pilot reforms in several financial products, including a yuan that’s freely convertible with foreign currencies, the Shanghai Daily reported, citing Mr Wang Xinkui, Director of the City Counsellor’s Office.

A more flexible yuan will help Premier Li Keqiang in his pledge to cut the role of the state in the economy while the increased global use of the currency may also help diversify the nation’s US$3.5 trillion forex reserves, the world’s largest.

“With Shanghai coming into the picture, there will eventually be doubts on whether Hong Kong could retain the pricing power in offshore yuan rates,” said ANZ economist Liu Ligang. “There’ll also be a drain on Hong Kong’s yuan liquidity should companies start to move yuan trade settlements to Shanghai. The Hong Kong government must think of what to do now,” he added.

China’s central government gave Hong Kong a head start in cornering the offshore yuan business before allowing similar transactions in the nation’s richest city. Hong Kong banks started taking yuan deposits in 2004 and the first offshore debt issue in the currency, known as a dim sum bond, was sold in the city by the China Development Bank in 2007.

Yuan trading in Hong Kong took off in 2009, when China allowed cross-border settlement for trade. The city has the world’s largest offshore yuan savings pool of 695 billion yuan (S$142.5 billion) and handles almost 90 per cent of trade payments denominated in the currency.

Shanghai is expected to catch up quickly: It has more than triple the population of Hong Kong, a higher savings rate and a wider choice of investments denominated in the Chinese currency. It also has the advantage of being located on the mainland of the world’s most populous nation.

However, the Hong Kong economy enjoys many structural advantages over the Shanghai free trade zone.

Hong Kong topped the list of the world’s freest economies for 19 consecutive years, according to the Heritage Foundation’s 2013 Index, followed by Singapore and Australia, while China ranked a very distant 136th.

“Hong Kong still has a lot of other advantages and strengths that Shanghai doesn’t have. It has the soft power, the legal system, infrastructure and international standards. These are great soft powers that it’s hard for any Chinese cities to catch,” said Citigroup’s Hong Kong-based yuan products manager Tan Shiming. BLOOMBERG