Hong Kong
20 February 2013
Growing offshore RMB deposits and planned cross-border collateral management services are both positives for Hong Kong’s financial services industry, as AST finds out
Image: Shutterstock
In July 2011, Bank of China launched its cross-border custody service product. As the first domestic bank to do so, it showed intent to prove that Chinese banking entities are capable of providing the cross-border custody services by themselves.
But progress in this area has not been as strong as it might. Laurence Van Der Haegen, head of operations at Euroclear Bank’s Hong Kong branch, says that it is typical for local Asian banks to cater for clients in their respective domestic markets, including domestic financial institutions.
“However, where a local bank needs to offer cross-border custody services, it will usually work with an international bank with a global presence or a proven capital market infrastructure service provider.”
Currently, he adds, Euroclear Bank is working with the Hong Kong market on its cross-border asset servicing aspirations.
Last summer, the Hong Kong Monetary Authority (HKMA), Euroclear Bank and J.P. Morgan Worldwide Securities Services (now a part of the investor services group) put in place a range of cross-border collateral management services for local firms. This launch enabled firms such as UBS in London and HSBC in Hong Kong to conduct their first ever renminbi (RMB) triparty repo, using Euroclear Bank and the HKMA as collateral management agents, respectively.
Van Der Haegen says that Euroclear Bank expects this development to prompt local banks in Hong Kong, and wider Asia, to increase their use of existing proven capital market infrastructure service providers for more of their cross-border custody needs, rather than trying to recreate their own model.
Pools of justice
The burgeoning RMB business is an advantage for Hong Kong’s financial services industry, and it is a fast-growing asset pool. In 2011, RMB trade settlement handled that was handled by banks in Hong Kong amounted to RMB1,915 billion, accounting for 92 percent of the total amount of mainland China’s external trade settled during that period (RMB2,081 billion).
The country has the largest pool of offshore RMB liquidity, and has become the global hub for RMB dimsum bonds, with issuance totaling RMB108 billion in 2011.
“Offshore RMB deposits are expected to continue growing,” agrees Van Der Haegen. “The HKMA reports that RMB cross-border settlement expanded four-fold from RMB50 billion in August 2010 to almost RMB200 billion in October 2012. HSBC estimates that by the end of 2015, the level of RMB deposits in Hong Kong will increase to a total of 30 percent from the current 9 percent of all Hong Kong deposits.”
Van Der Haegen says that, for the clients that Euroclear Bank serves in the region, it is witnessing strong growth in the value of domestic fixed-income securities deposited in Hong Kong.
“In fact, this trend is true of almost all of Asia. The most remarkable growth is in Australian and Singaporean fixed-income debt. Experts predict that private wealth management will continue to shift towards Asia, particularly to financial centres like Singapore. Money managers in the region will look to make their clients’ assets work hard. Consequently, Singapore and Asia as a whole is already experiencing unprecedented cross-border securities transaction flows as the investment communities are looking for competitive returns around the globe.”
Though national institutions control the biggest pool of assets in Asia, Van Der Haegen asserts that they are open to participating with global players.
“Over 50 percent of our clients in Asia are national central banks, and they express their confidence in our operational expertise and safety by entrusting us with a growing amount of their business.”
Free entry
Foreign investors’ frustration at not being able to buy or sell shares on China’s stock exchanges due to the region’s tight capital controls came to an abrupt end in 2002 with the launch of the Qualified Foreign Institutional Investor (QFII) programme. QFII meant that licensed investors can buy and sell RMB-denominated A shares—with the caveat that foreign access to these shares is limited by specified quotas that determine the amount of money that the licensed foreign investors are permitted to invest in China’s capital markets.
“The licence programme aims to open up mainland China’s stock exchanges to foreign investors,” says Vander Haeden. “To date, over 100 firms are accredited under the QFII label. However, the levels of future foreign investment into this country hinges on the pace of capital market liberalisation that China’s authorities permit.”
China Securities Regulatory Commission chairman Guo Shuqing said in Hong Kong early this year that quotas for the US dollar-denominated QFII and RMB-qualified foreign institutional investor (RQFII) schemes could be increased by as much as 10-fold.
At present, the RQFII scheme allows only Hong Kong-listed mainland fund managers to invest their offshore RMB in the domestic equity and bond markets.
However, analysts have shrugged off the announcement, stating that bigger QFII quotas are unlikely to draw investors concerned about a flagging A-share market.
Disregarding the downside of QFII, it seems as though asset servicers are booking the benefits of closer links with Asian markets.
Beginning with creating closer ties with the depositories and agents in the region to help along information flows—key in a market that still prizes local knowledge highly—firms have been able to create valuable clients.
Financial secretary John Tsang predicted that Hong Kong’s economy should perform “slightly better” in 2013 than last year, backtracking on an earlier claim that Hong Kong’s trade-reliant economy may enter recession if its major partners show a loss of growth momentum or signs of contraction.
But, with a long-established custody hub, and strong infrastructure, Hong Kong’s value as a custody sector does not look set to wane any time soon.
But progress in this area has not been as strong as it might. Laurence Van Der Haegen, head of operations at Euroclear Bank’s Hong Kong branch, says that it is typical for local Asian banks to cater for clients in their respective domestic markets, including domestic financial institutions.
“However, where a local bank needs to offer cross-border custody services, it will usually work with an international bank with a global presence or a proven capital market infrastructure service provider.”
Currently, he adds, Euroclear Bank is working with the Hong Kong market on its cross-border asset servicing aspirations.
Last summer, the Hong Kong Monetary Authority (HKMA), Euroclear Bank and J.P. Morgan Worldwide Securities Services (now a part of the investor services group) put in place a range of cross-border collateral management services for local firms. This launch enabled firms such as UBS in London and HSBC in Hong Kong to conduct their first ever renminbi (RMB) triparty repo, using Euroclear Bank and the HKMA as collateral management agents, respectively.
Van Der Haegen says that Euroclear Bank expects this development to prompt local banks in Hong Kong, and wider Asia, to increase their use of existing proven capital market infrastructure service providers for more of their cross-border custody needs, rather than trying to recreate their own model.
Pools of justice
The burgeoning RMB business is an advantage for Hong Kong’s financial services industry, and it is a fast-growing asset pool. In 2011, RMB trade settlement handled that was handled by banks in Hong Kong amounted to RMB1,915 billion, accounting for 92 percent of the total amount of mainland China’s external trade settled during that period (RMB2,081 billion).
The country has the largest pool of offshore RMB liquidity, and has become the global hub for RMB dimsum bonds, with issuance totaling RMB108 billion in 2011.
“Offshore RMB deposits are expected to continue growing,” agrees Van Der Haegen. “The HKMA reports that RMB cross-border settlement expanded four-fold from RMB50 billion in August 2010 to almost RMB200 billion in October 2012. HSBC estimates that by the end of 2015, the level of RMB deposits in Hong Kong will increase to a total of 30 percent from the current 9 percent of all Hong Kong deposits.”
Van Der Haegen says that, for the clients that Euroclear Bank serves in the region, it is witnessing strong growth in the value of domestic fixed-income securities deposited in Hong Kong.
“In fact, this trend is true of almost all of Asia. The most remarkable growth is in Australian and Singaporean fixed-income debt. Experts predict that private wealth management will continue to shift towards Asia, particularly to financial centres like Singapore. Money managers in the region will look to make their clients’ assets work hard. Consequently, Singapore and Asia as a whole is already experiencing unprecedented cross-border securities transaction flows as the investment communities are looking for competitive returns around the globe.”
Though national institutions control the biggest pool of assets in Asia, Van Der Haegen asserts that they are open to participating with global players.
“Over 50 percent of our clients in Asia are national central banks, and they express their confidence in our operational expertise and safety by entrusting us with a growing amount of their business.”
Free entry
Foreign investors’ frustration at not being able to buy or sell shares on China’s stock exchanges due to the region’s tight capital controls came to an abrupt end in 2002 with the launch of the Qualified Foreign Institutional Investor (QFII) programme. QFII meant that licensed investors can buy and sell RMB-denominated A shares—with the caveat that foreign access to these shares is limited by specified quotas that determine the amount of money that the licensed foreign investors are permitted to invest in China’s capital markets.
“The licence programme aims to open up mainland China’s stock exchanges to foreign investors,” says Vander Haeden. “To date, over 100 firms are accredited under the QFII label. However, the levels of future foreign investment into this country hinges on the pace of capital market liberalisation that China’s authorities permit.”
China Securities Regulatory Commission chairman Guo Shuqing said in Hong Kong early this year that quotas for the US dollar-denominated QFII and RMB-qualified foreign institutional investor (RQFII) schemes could be increased by as much as 10-fold.
At present, the RQFII scheme allows only Hong Kong-listed mainland fund managers to invest their offshore RMB in the domestic equity and bond markets.
However, analysts have shrugged off the announcement, stating that bigger QFII quotas are unlikely to draw investors concerned about a flagging A-share market.
Disregarding the downside of QFII, it seems as though asset servicers are booking the benefits of closer links with Asian markets.
Beginning with creating closer ties with the depositories and agents in the region to help along information flows—key in a market that still prizes local knowledge highly—firms have been able to create valuable clients.
Financial secretary John Tsang predicted that Hong Kong’s economy should perform “slightly better” in 2013 than last year, backtracking on an earlier claim that Hong Kong’s trade-reliant economy may enter recession if its major partners show a loss of growth momentum or signs of contraction.
But, with a long-established custody hub, and strong infrastructure, Hong Kong’s value as a custody sector does not look set to wane any time soon.
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