The Role of Hong Kong as China’s Comprehensive International Financial Center

Author:GAO Zhanjun  Christopher HUI

The Outline of the 14th Five-Year Plan for National Economic and Social Development of the People's Republic of China and the Long-Range Objectives Through the Year 2035 (14th Five-Year Plan) establishes the crucial role of China's Hong Kong((hereinafter referred to as Hong Kong) in China's overall development. The plan aims to strengthen Hong Kong's international financial center status，reinforce its role as an offshore RMB hub，and continue to deepen and expand the interconnection between the Mainland and Hong Kong markets. From the perspective of Hong Kong as an international financial center，how to better connect with the mainland's financial market in the future and help promote the internationalization of the RMB，GAO Zhanjun，editor-in-chief of China Forex，conducted an exclusive interview with Mr. Christopher Hui，Secretary for Financial Services and the Treasury of Hong Kong Special Administrative Region (HKSAR) .

Discussion 1

Hong Kong’s Positioning

GAO Zhanjun: The 14th Five-Year Plan has outlined Hong Kong's significant role in the overall development of China. Regarding the enhancement of the position of a global financial hub，I would appreciate hearing your insights.

Christopher HUI: The advancement of Hong Kong as a global hub must align with China’s development blueprint. In the report to the 20th National Congress of the Communist Party of China (NCCPC)，President Xi Jinping pointed out that our country will be developed into a modern socialist country with composite national strength and international influence. The next five years will be a critical period for implementing China’s strategies and establishing a new high-quality open economic system. To better align with the national strategy，Hong Kong must reinforce its position and enhance the growth of its financial services industry.

The 14th Five-Year Plan supports the development of Hong Kong's status as an international financial center. This includes strengthening its position as a global offshore renminbi business hub，an international asset management center，and a risk management center. Additionally，the plan aims to deepen and broaden mutual access between the financial markets of the Mainland and Hong Kong to promote the growth of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) as a high-quality economic region. Along the directions set out above，the HKSAR Government will strive to develop relevant disciplines with a view to contributing to the high-quality opening-up of the financial system and real economy development of our country，while keeping up with our development momentum and continuously consolidating Hong Kong’s status as an international financial center.

Over the past few years，global financial markets have been ravaged by heightened geopolitical tensions，rising interest rates，tighter money supply in major markets，and the COVID-19 pandemic. Despite various challenges and disturbances，Hong Kong has continued to develop and grow in the global competitive environment. The foundation of Hong Kong as a premier financial center remains solid，with an open business environment，a simple and low tax regime，free capital flows，a common law system  aligned with the West，robust financial regulation，and a free economic system that is widely recognized by international investors. Compared to other financial hubs around the world，Hong Kong's historical，current，and future strengths stem from the backing of China and the "one country，two systems" framework. This serves as the cornerstone of our crucial role as a "super connector" bridging international and domestic markets.

Benefiting from various opportunities arising from the national development strategies and the recovery from the pandemic，international investors have been actively returning to Hong Kong financial market，demonstrating our role as a premier global  fundraising hub. The Hong Kong stock market rebounded about 40% from its low in October 2022 to the end of the first quarter of 2023. In 2022，the total amount of initial public offerings raised in Hong Kong exceeded US$13 billion，ranking fourth in the world and second in major markets outside the mainland. In 2022，the total private equity funds raised in Hong Kong ranked second in Asia. Hong Kong has been the top in arranging international bond issuance by Asian entities for six consecutive years since 2016，capturing 30% of the market by 2022. All this has demonstrated that Hong Kong remains an attractive location for parking assets and raising funds from confident investors in and outside the territory. However，our focus has not been on what we are doing well，but new areas that we could contribute to our country while benefitting Hong Kong’s financial services sector.

Discussion 2

Contributing to RMB Internationalization

GAO Zhanjun: The report of the 20th National Congress of the Communist Party of China (NCCPC) clearly stated that the internationalization of RMB should be promoted in an orderly manner. As a prominent financial center on the international stage，particularly as a pivotal link between China and the global community，what distinct contribution can Hong Kong make in the process of RMB internationalization?

Christopher HUI: With China's rapidly growing economy now ranking as the world's second largest，its trade volume has also increased，leading to a rising global usage of the RMB currency. According to the RMB Internationalization Report 2022 published by the People’s Bank of China，cross-border RMB settlement has continued to grow，and cross-border two-way investment activities have remained dynamic. The basic policy framework for cross-border RMB investment，financing and settlement continued to improve. As stated in the report to the 20th NCCPC，our country will promote the internationalization of RMB in an orderly way. As the world’s largest offshore RMB hub which processes around 75% of offshore RMB settlement globally，Hong Kong has a solid foundation to further strengthen RMB business and contribute to RMB internationalization，while at the same time promoting the bilateral investment flows with the Mainland.

As a major gateway for both Mainland and international investors，mutual market access between the financial markets in the Mainland and Hong Kong has thrived and expanded rapidly in the past few years. Since the launch of Stock Connect at the end of 2014，its Northbound Trading has brought a net inflow of 1,720 billion yuan to the mainland stock market; its Southbound Trading has brought a net inflow of more than HK$2,570 billion to the Hong Kong stock market. The average daily trading value of Northbound Trading and Southbound Trading of Stock Connect surged from 5.58 billion yuan and HK$0.93 billion in 2014，to 100.36 billion yuan and HK$31.74 billion respectively in 2022，representing an increase of a 17-fold and 33-fold increase. On the other hand，RMB bonds issued in Hong Kong has increased by 13-fold from10 billion yuan in 2007 to 143.4 billion yuan in 2022. Bond Connect's Northbound Trading turnover in 2022 exceeded 8,000 billion yuan，an increase of about 28 times from 276.0 billion yuan in 2017.

Under the “dual circulation” national strategy，the increase in offshore investment options will encourage the use of RMB outside the Mainland and create an ecosystem of RMB product issuers，investors and intermediaries. The successful experiences of Stock Connect and Bond Connect have demonstrated that Hong Kong can assist the Mainland in expanding orderly opening of its financial market and introduce foreign investors to hold onshore RMB assets in a risk-controlled manner. Looking ahead，we will seek to further expand mutual access and provide diversified risk management tools to help foreign investors effectively manage their exposure，provide incentives for them to increase RMB asset allocation，and enhance the RMB’s role as an international investment currency.

Hong Kong has been promoting the issuance and trading of RMB stocks. As the most liquid capital market in Hong Kong，the total stock market turnover in 2022 exceeded HK$30 trillion，with an average daily turnover of close to HK$125 billion. As a key initiative to strengthen RMB’s role as an international currency for investment and cater for the escalating demands from global investors，the HKSAR is actively promoting the issuance and trading of RMB stocks. We are enhancing the trading mechanism of stocks denominated in both HKD and RMB in Hong Kong (so called dual-counter stocks)，so as to minimize price discrepancies between the two-currency trading counters of the same stock. Specifically，the HKSAR Government has amended the law to exempt the stamp duty payable for transactions relating to dual-counter stock made by market makers，to support the upcoming launch of a dual-counter market maker (DCMM) regime by the Hong Kong Exchanges and Clearing Limited (HKEX). Through providing continuous quotes and responses to quotes at the RMB counter，the regime would facilitate investors to trade at their preferred prices and hence promote price efficiency. At the same time，the DCMMs can conduct arbitrage transactions between the two counters，so that the prices offered in the two currencies will converge over a long-term horizon.  The Government and HKEX have also maintained close communication with listed issuers to assist them in setting up RMB trading counters. More than 20 issuers，accounting for 40% of our daily average of market turnover，have applied to HKEX for setting up RMB counters in addition to HKD counters with a view to enabling trading of their stocks in both currencies following the introduction of the DCMM regime.

Separately，we are most happy to see that the China Securities Regulatory Commission announced to start studying including RMB trading counter for dual-counter stocks under Southbound Trading of Stock Connect. This will facilitate Mainland investors to buy and sell Hong Kong stocks in RMB，which will help reduce exchange-related costs and boost the confidence of investors outside the Mainland territory in trading RMB-denominated stocks in Hong Kong. The HKSAR Government and financial regulators are collaborating closely with the Mainland with a view to implementing the initiative promptly.

Hong Kong has also developed into an international bond center and a green and sustainable finance hub in the region.  On issuing RMB bonds，in addition to the annual issuance of sovereign bonds by the Ministry of Finance in Hong Kong since 2009，the Shenzhen Municipal People’s Government (Shenzhen Government) issued 5 billion yuan of offshore RMB municipal government bonds in Hong Kong in 2021，which was the first time that a Mainland municipal government issued offshore bonds. In 2022，the People’s Government of Hainan Province also issued its first offshore RMB bonds in Hong Kong，and the Shenzhen Government issued RMB bonds in Hong Kong for the second time. The types of bonds issued by the two aforementioned Mainland local governments included green bonds，blue bonds and sustainability bonds，further enriching the range of RMB financial products available in the Hong Kong market and promoting RMB internationalization while demonstrating Hong Kong's strengths as a green finance platform.

In accordance with the Exemption from Profits Tax (Shenzhen Municipal People’s Government Debt Instrument) Order (Cap. 112DP) effective since March 2022，the interest paid or profit received arising from the debt instruments issued in Hong Kong by the Shenzhen Government is exempted from the payment of profits tax. To support and facilitate more Mainland local governments to issue bonds in Hong Kong，we have made the Exemption from Profits Tax (Debt Instrument Issued by Mainland Local People’s Government at Any Level) Order to extend the coverage of the profits tax exemption to the debt instruments issued in Hong Kong by all Mainland local people’s governments at any level. This Order has come into operation from 31 March 2023. Moreover，the Hong Kong Monetary Authority (HKMA) has also since 2021 expanded the list of eligible collateral for the RMB Liquidity Facility to include RMB，USD and Euro denominated debt securities issued in offshore markets by the Mainland local people’s governments at any level.

As more offshore investors increased their RMB asset allocations，there is also a surge in demand for alternative invest