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Financial Secretary


The Launch of Dual Counter Model in Hong Kong's Stock Market

Since the first state-owned enterprise was listed in Hong Kong in 1993, many Mainland enterprises have followed the footsteps and come to Hong Kong for fundraising. This has helped Mainland enterprises to undertake structural reform and align with the international capital market and governance standards, thus enhancing their competitiveness. On the other hand, it provides more investment choices with promising returns for international capital, making the last 30 years a golden era for the Hong Kong stock market. Today, the orderly internationalisation of Renminbi (RMB) has been accelerating, injecting new impetus for Hong Kong to further deepen, widen and broaden the local financial market. All these have further consolidated Hong Kong's status as an international financial centre, making its leadership role more prominent.

In fact, as at the first quarter of this year, the proportion of RMB in cross-border payments and receipts in the Mainland has risen to 48%, surpassing the US dollar for the first time. RMB has become the most commonly used currency in the Mainland's cross-border transactions. While more Mainland enterprises are using RMB as the settlement currency for cross-border trade, the use of RMB by other countries as the currency in bilateral cross-border trade settlement and for investment has also increased. The internationalisation of RMB is accelerating, bringing new and historic opportunities for the development of Hong Kong's offshore RMB business. We must seize these opportunities.

Hong Kong is a global hub for offshore RMB business. As at end April this year, the size of offshore RMB deposits in Hong Kong, including certificates of deposit, was close to RMB1 trillion, making it the world's largest offshore pool of RMB funds. We are actively enriching Hong Kong's offshore RMB asset pool, seeking to fulfil the functions of RMB as a currency for international payment, investment and reserve. This will make the entire offshore RMB ecosystem more vibrant.

In fact, since the launch of Shanghai-Hong Kong Stock Connect in 2014, the scope and capacity of the mutual market access programme has been gradually expanding to cover Shenzhen-Hong Kong Stock Connect, Bond Connect, Cross-boundary Wealth Management Connect in the Greater Bay Area, ETF Connect and Swap Connect, etc., further increasing the channels for the two-way fund flows while containing the risk of capital outflows under closed-loop management. The upcoming "HKD-RMB Dual Counter Model" for securities trading will facilitate more efficient flow of offshore RMB in the international market.

HKEX will launch the Dual Counter Model for trading on 19 June. The first batch will cover 24 stocks which can be traded in HKD or RMB respectively. The two counters will have the same share holder register, with same physical shares in which holders' rights and entitlements would be the same. These stocks cover industries in technology, finance, properties and consumer products, accounting for some 40% of the average daily turnover of Hong Kong's stock market. This will offer more diversified investment options for local and global offshore RMB holders. Looking ahead, we can expect a gradual increase in the number of stocks adopting the Dual Counter Model. To minimise the price difference between the two counters effectively while promoting the liquidity of the RMB counter, the new arrangement also includes setting up the "Dual Counter Market Maker" regime. At present, nine exchange participants have been designated as such market makers to provide liquidity for relevant trading. Going forward, we will promote the inclusion of RMB-denominated securities under Southbound Trading of Stock Connect, so that Mainland investors can trade Hong Kong shares with onshore RMB funds, reducing the potential exchange rate risk when their funds go south.

Hong Kong must continue to enhance the richness and convenience of the offshore RMB business market. This will not only help the internationalisation of RMB but also meet the needs arising from changes in the international political and economic landscape in recent years. In particular, geopolitical tensions have become increasingly complex; the US banking industry has been in turmoil in recent months; and the US government has long been plagued by debt problems, while at the same time "monetising" huge deficits and arbitrarily freezing or even confiscating assets of other countries. These actions have undermined international confidence in the US dollar and prompted many countries to diversify their foreign exchange reserves. On the other hand, although our country's economy continues to grow steadily and is also the world's largest trading nation, which accounts for about 13.5% of global trade, the proportions of RMB in global cross-border SWIFT payment settlement and as a reserve are both currently less than 3%. There is significant room for growth in the future.

In the foreseeable future, the global demand for using RMB will only grow further. With a richer and deeper product mix, coupled with the enhancement of mutual market access, Hong Kong can play a unique and strategic role in RMB internationalisation and contribute to national development. Apart from the upcoming launch of the Dual Counter Model, we have been actively working to develop and expand mutual market access, and made good progress over the past year. For example, the inclusion of exchange-traded funds under Stock Connect was officially launched in July last year, offering more diverse asset allocation choices to Mainland investors. The initiative has been widely accepted by investors since its commencement. The Northbound average daily trading volume was around RMB240 million in April 2023, representing an increase of over 11 times since the first month of its launch; the Southbound average daily trading volume was around HK$1.96 billion, representing an eight-fold increase since the first month of its launch. In a similar vein, given the escalating demands for more diverse RMB investment products in the market, the turnover and capacity of the Dual Counter Model will gradually increase and expand in the future.

In addition, we also saw the inclusion of more eligible stocks under Stock Connect in March 2023, covering the securities of overseas enterprises that have been primary listed in Hong Kong and fulfil certain conditions for Southbound Trading; and more stocks of the Shanghai Stock Exchange A Share Index and the Shenzhen Stock Exchange Composite Index under Northbound trading. This not only facilitates Mainland and international investors to diversify their global asset allocations, but is also conducive to attracting more quality foreign companies to get listed in Hong Kong.

Meanwhile, the launch of Northbound trading of Swap Connect (i.e. mutual access between the interest rate swap markets) in mid-May has facilitated offshore investors holding onshore bonds to trade interest rate swap products in the Mainland so that they could better manage exchange rate fluctuations. Swap Connect will create synergy with Bond Connect, which will help enhance the depth and breadth of the opening up of the Mainland's financial markets. On the first day of launch, 27 offshore institutions traded onshore RMB interest rate swaps with a notional value exceeding RMB 8.2 billion.

Earlier this month, we also successfully issued green bonds worth around US$6 billion, which was well received by the market. In particular, the RMB tranches accounted for RMB15 billion, which represented a 50% increase compared to the amount issued in January this year. A new 10-year RMB tranche was also issued. These would help extend the offshore RMB yield curve and enrich offshore RMB product offerings.

Looking ahead, we will continue to explore with the industry and relevant Mainland institutions on expanding the channels for two-way cross-boundary RMB fund flows; provide more investment and risk management products; and build a more vibrant offshore RMB ecosystem. The Securities and Futures Commission, HKEX and the Hong Kong Monetary Authority are in discussion with Mainland institutions regarding the launch of Mainland government bond futures in Hong Kong as well as further improving the offshore RMB financial infrastructure so as to enhance its capacity. These will support the long-term development of Hong Kong's offshore RMB market.

June 11, 2023

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