China takes next step in currency globalization, with some HK stocks priced in yuan

Sun Hung Kai & Co

16/06/2023 10:35

By Samuel Shen and Georgina Lee
       SHANGHAI/HONG KONG, June 16 (Reuters) - China's gradual
internationalisation of its currency will shift to its next leg
on Monday when about two dozen Chinese companies start trading
in their home currency in Hong Kong's stock market.
    Hong Kong stocks such as Alibaba  9988.HK  and Tencent
 0700.HK  are among the 24 stocks which will be priced and
traded in both yuan and the Hong Kong dollar under the Dual
Counter Model on the Hong Kong stock exchange (HKEX) from
Monday. 
        The scheme is targeting overseas investors with yuan
holdings initially, but will later include mainland investors
via the Hong Kong-China Stock Connect link-up later. Offshore
yuan deposits in Hong Kong alone are estimated at some 833
billion yuan ($117 billion).
    Fund managers say the step reflects Beijing's desire to
expand the use of yuan outside China and provide another avenue
for yuan-denominated investment, thus reducing the risk of
capital outflows chasing higher yielding currencies such as the
U.S. dollar.  
    "China is pushing yuan internationalisation to avert
geopolitical risks and reduce reliance on the dollar, and for
that purpose, you need wider use of the Chinese currency," said
Ding Wenjie, strategist of Global Capital Investment at China
Asset Management Co (ChinaAMC). 
    Ding said the scheme is a major milestone and expects the
model to be expanded in future, beyond stocks to bonds and even
alternative assets, boosting overseas asset pools denominated in
yuan  CNY=CFXS .
    The initiative comes amid a steady stream of bilateral
yuan-denominated deals China has struck with trading partners,
from Chinese oil purchases in the Middle East, to commodities
trade with partners from Brazil to Russia. Beijing has retained
close ties with Moscow despite the invasion of Ukraine. 
    The U.S. dollar remains the dominant global currency,
accounting for 42% of global payments. The yuan's share is just
2.29%, but is up from 1.95% two years ago. 
    A significant breakthrough in China's efforts to promote use
of the yuan came this month, when Pakistan paid for its first
government-to-government import of discounted Russian crude oil
in yuan.     
    "When a currency is internationalised, it's not only used in
trade, physical goods, or services. It also has to be parked in
investment vehicles," said Dong Chen, Head of Asia Macroeconomic
Research at Pictet Wealth Management. 
    For foreign investors with yuan holdings, "buying shares in
Hong Kong without really going into mainland China will be a
much, much easier way to park your holdings of this currency,"
he said. 
    
    YUAN INCENTIVES 
    Under the dual counter arrangement, investors can choose to
trade a stock either using Hong Kong dollars  HKD=  via the HKD
counter, or yuan via the RMB counter, with market makers
providing liquidity and minimizing price discrepancies. 
    Most of the first batch of stocks eligible for yuan trading
- which include AIA Group  1299.HK , Sun Hung Kai Properties
 0086.HK  and Hang Seng Bank Ltd  0011.HK  - are not listed in
China. 
    Fund managers expect a lukewarm interest in the yuan
counters initially, given near-term risks including a weakening
yuan and wobbly stocks as China's economy struggles. But they
expect demand to pick up over time.
    "Mainland investors, including mutual fund companies like
us, have genuine incentives to trade Hong Kong stocks in yuan,"
said Ding of ChinaAMC.
    "Our fund returns and dividends are priced in yuan, so using
the RMB counter can remove forex exchange costs, and shield us
from currency volatility." 
    There are many other reasons to trade in yuan, said David
Friedland, Asia Pacific managing director at Interactive
Brokers, which offers yuan-trading services. 
    "There's lot of political uncertainty these days so you may
want to hold yuan rather than U.S. dollars, or the Hong Kong
dollar, which is pegged to the U.S. dollar." 

    ($1 = 7.8217 Hong Kong dollars)

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EXPLAINER-What is Hong Kong's new dual HKD/RMB share counter?   
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 (Reporting by Samuel Shen and Georgina Lee; Editing by Vidya
Ranganathan and Kim Coghill)
 ((samuel.shen@thomsonreuters.com;  +86 21 20830018; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))