K. C. Chan: Pushing for MPF Access to Mainland Bond Market

In a December 2011 interview, Secretary for Financial Services and the Treasury K. C. Chan said he hoped to win MPF products access to the mainland bond market to widen their investment channels. The remarks came as Beijing had just delivered a package of financial “gifts” to Hong Kong — including RMB FDI and RMB QFII — with mainland commerce ministry and central bank officials due in town to brief the business community.

Could MPF invest in mainland bonds in 2011?

As of December 2011, MPF had not been admitted to the mainland interbank bond market. Financial Services Secretary K. C. Chan said he would seek more mainland investment channels for MPF and other insurance products, having led a Hong Kong insurance delegation to Beijing the previous month to press the case.

RMB FDI and QFII Details Landing

Vice-Premier Li Keqiang’s August 2011 visit to Hong Kong confirmed several measures: RMB FDI (foreign direct investment), RMB QFII (a quota allowing offshore renminbi to invest in the mainland), and listing Hong Kong ETFs on the mainland. The Hong Kong government was set to co-host a major seminar with the city’s four big chambers of commerce, with mainland officials explaining application procedures in person.

Currency Softness Won’t Derail Policy

The renminbi had recently reversed its long strength, and former central bank adviser Yu Yongding had warned of depreciation and urged a pause on renminbi internationalisation policies, fuelling fears Beijing would slow RMB FDI. Chan said there was no need for excessive worry — progress was “going well” and the policy direction would not be swayed by exchange-rate moves.

The True Gauge: Trade Settlement Share

Chan argued the real indicator of renminbi internationalisation was the share of mainland foreign trade settled in renminbi: the higher the share, the more willing people were to use offshore renminbi. Mainland trade settled in renminbi had risen from 2.5 per cent of total trade in 2010 to 10 per cent at the time.

He added that a two-way exchange rate could actually encourage corporate use of the currency — under appreciation expectations people tended to “hold” rather than “use” renminbi, leaving offshore flows lopsided, but the outflow-inflow gap had recently narrowed markedly.