In an uncertain macroenvironment, Hong Kong is unwavering in its role as an international financial centre. Taking place in Hong Kong on 5 July, OMFIF’s global finance forum convened a highly influential group of speakers from public and private sectors in both Hong Kong and China. In a keynote in conversation, Hong Kong Monetary Authority Chief Executive Eddie Yue spoke with OMFIF Chief Executive Officer John Orchard to discuss Hong Kong’s preeminent role as an international financial centre.
Sanguine view on inflation and monetary policy
The inflationary pressure in Hong Kong was contained compared to most major economies due to weak domestic demand and the fact that Covid-19 reopening was still nascent. Rent and housing costs, which account for approximately 25% of the consumer price index basket in Hong Kong, have remained soft. Despite global inflation concerns driven by energy and supply chain disruptions, the inflation rate has hovered around 2% and is expected to stay moderate. While inflation is falling in Europe and the US, reining in inflation from the current 4% to 5% to the 2% target rate could be more challenging.
Over the past several decades, various structural changes like demographic trends, technological innovation and globalisation have been disinflationary. However, emergent trends of supply chain fragmentation, the energy transition and labour market dynamics could be inflationary. These concurrent trends make it difficult to determine the trajectory of the real neutral interest rate.
Bolstering non-bank financial institution regulation
Rising interest rates pose potential challenges for the financial sector – highlighting the importance of effective regulation and supervision. The banking system in Hong Kong has been robustly regulated and remains resilient, with the capital adequacy ratio averaging around 20% and liquidity coverage ratio around 160%.
Globally, unlike the more carefully regulated banking sector, non-bank financial intermediaries – such as money market funds, corporate bonds, hedge funds and insurance companies – warrant closer scrutiny due to the possibility of hidden leverage and interconnections with the broader financial system. Supervision and data collection in these areas remain crucial, considering factors such as credit tightening in regional banks, structural changes, remote work arrangements and the impact on commercial real estate and housing markets. Monitoring non-bank and interest rate-sensitive sectors will be critical to ensure the overall stability of the financial system.
Growing interest in the renminbi
The discussion also touched on the evolving role of currencies in the global economy, with the dollar still dominating, but the euro and renminbi gaining traction. These trends were also observed in OMFIF’s 2023 Global Public Investor survey of reserve managers. On average, respondents expect that the dollar will only marginally decrease to 54% of global reserves in 10 years’ time, from the current approximately 60%. The renminbi is expected to increase from the current 2.6% to around 6% of total global reserves.
As demand for renminbi increases, Hong Kong is poised to play a crucial role given its position as the largest offshore market for the renminbi and its efforts to develop renminbi capital markets. Notably, the issuance of renminbi bonds in Hong Kong has doubled in the last year. Hong Kong aims to offer a comprehensive suite of renminbi products supported by ample liquidity and infrastructure, while also serving as a firewall for Mainland China to mitigate potential shocks arising from the internationalisation of the renminbi.
Innovating beyond the ‘gateway to China’
Though experiencing various challenges, Hong Kong’s financial system remains robust, characterised by the free flow of capital, a reputable common law system and strong regulatory frameworks adhering to international standards. The city continues to play a vital role as a gateway linking China and the world, serving as a platform for international investors seeking exposure to the Chinese market. Notably, around 70% of stock and bond holdings for international investors in the Chinese market flow through Hong Kong, highlighting its significance as a global financial centre.
Beyond its strategically important role at the juncture between Chinese and international financial markets, Hong Kong has been actively developing itself as a forefront in other global financial trends, such as in areas of environmental, social and governance and digital financial services. While also working on initiatives concerning central bank digital currency development, virtual assets and tokenisation, it is also clear that the city is making strides in financial matters of the future.
Taylor Pearce is Senior Economist at OMFIF.