Hong Kong’s ‘one stock, two currencies’ plan reflects China’s yuan ambitions
By Georgina Lee and Summer Zhen
HONG KONG, Oct 18 (Reuters) – As Hong Kong prepares to launch yuan-denominated stocks in its markets, investors and analysts view it mainly as a test run for China’s ambitions to internationalise the yuan.
In the weeks since Hong Kong Financial Secretary Paul Chan disclosed the plan for a ‘one stock, two currencies’ stock trading option, a bunch of blue-chip firms have said they will launch yuan-denominated shares in the city.
As per Chan, the plan is another hook for Hong Kong’s role as the pre-eminent offshore yuan hub. For most mainland investors, it is merely an extension of China’s “one country, two systems” policy.
Market analysts say it’s no coincidence that the plan came just ahead of China’s twice-a-decade Communist Party Congress, at which Chinese President Xi Jinping made clear that Hong Kong will be run by patriots and integrated further with the mainland.
“The settlement of security transaction in yuan across the border is more of a market infrastructure driver for yuan internationalisation,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.
Institutional investors in particular didn’t really need a yuan-denominated trading counter in Hong Kong, given they can easily hedge the currency, Wang said.
China has had a long-standing objective of greater “internationalisation” of the yuan, encouraging its use as a trade settlement currency and promoting yuan-denominated cross-border investments, while leveraging Hong Kong as a major hub for its global offshore yuan business.
LITTLE INCENTIVE
The exact timeline for the launch of the yuan trading counters, which will be part of the southbound leg of the Stock Connect investment channel that connects the Hong Kong, Shanghai, and Shenzhen stock exchanges, is not known.
A market maker system for yuan stocks, which will pave the way for the debut of the yuan trading counters, is slated for the first half of 2023.
Hong Kong Exchanges & Clearing (HKEX) chief executive Nicolas Aguzin is confident this will make settlements easier and bolster flows from China’s retail investors.
It could also be another route for global investors to own yuan assets. Foreigners own less than 5% of mainland yuan-denominated stocks.
Chinese investors say they will bite only if it improves liquidity in Hong Kong-listed Chinese issuers or provides access to a wider pool of stocks.
Mark Dong, co-founder of Minority Asset Management which manages onshore yuan and offshore dollar funds, says the only incentive for mainland investors is to seek “undervalued and high-dividend names which are scarce at home”.
Over a dozen Hong Kong-listed Chinese companies including Tencent, Alibaba Group, New World Development and Xiaomi have said they will explore setting up yuan trading counters.
Yet, there are other disincentives for mainland investors, chiefly the recent underperformance of Hong Kong’s stock market and the yuan’s weakness.
“Yuan trading counter will provide the convenience, but it won’t affect investors’ ultimate trading behaviour and preference” said Xu Lei, chief investment officer at Shanghai-based Generosity Investment, which manages funds that invest…
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