About HKTDC | Media Room | Contact HKTDC | Wish List Wish List () | My HKTDC |
Save As PDF Print this page

Boosting Purchasing Power(HKTDC Hong Kong Trade Services, Vol 01,2004)

Vol 1, 2004

Banking, Finance & Insurance

Boosting Purchasing Power

Reducing Risk Across Borders


Boosting Purchasing Power

Standing tall: personal renminbi transactions will further reinforce Hong Kong's internationally recognised position as a financial gateway to the Chinese mainland

The rapidly expanding role played by the Chinese mainland economy in international trade is inevitably impacting global finance and monetary spheres as well.

The renminbi is now emerging as a major currency in the mainland's immediate neighbourhood, even though it is yet to become fully convertible, as Hong Kong Association of Banks chairman and director of Standard Chartered Bank director Peter Wong explains.

"The rapid rise in the mainland's international trade has led to an increase in circulation of the renminbi in neighbouring economies," he observes.

The large number of Chinese travelling overseas for business and pleasure is also helping the currency become more acceptable, especially in Asia.

"In countries such as Vietnam, parts of Russia bordering the mainland, and particularly in Hong Kong, the renminbi is circulating widely as if it is a hard currency," he notes.

However, the renminbi is unlikely to become fully convertible anytime in the next few years because, as Wong explains, "the mainland needs to manage the transition problems of the economy and of the financial system."

At the same time, he foresees a gradual relaxation of capital controls on the mainland and an equally steady liberalisation of the exchange rate in line with mainland government statements.

"We could expect more and more cross-border transactions between the mainland and the rest of the world," Wong says, noting that some of these currency transactions will be done in renminbi.

The growing influence of the renminbi is felt nowhere more keenly than in the Hong Kong Special Administrative Region (SAR), as its geographical proximity to the mainland has led to the establishment of closer economic ties. "It is, therefore, natural to expect an increasing volume of renminbi transactions in Hong Kong," Wong says.

One of the most important recent developments in this regard has been the approval from the mainland's State Council for the People's Bank of China to provide clearing arrangements for licensed banks in Hong Kong to conduct personal renminbi business.

The scope of the personal renminbi business will be confined mainly to transactions by individuals to facilitate their personal spending, and will include "deposit-taking, exchange, remittance and renminbi card business", but not lending, including interbank lending, operations.

Wong feels the recent introduction of renminbi business in Hong Kong will help the SAR to cement its international financial centre status. "The rising international demand for the renminbi should also set the scene for Hong Kong to become the mainland's 'offshore centre' for renminbi in future," he believes.

In his opinion, this will mark the "beginning of the development of a formal market in renminbi outside the mainland's own financial system".

While initially the renminbi business conducted by banks in Hong Kong is expected to be largely confined to accepting deposits and settling tourism transactions, Wong is confident these services will eventually grow.

"The significance of renminbi businesses in Hong Kong goes far beyond an additional currency for banks to accept as deposits," he maintains. "It means the development of clearing and settlement capabilities in renminbi by Hong Kong banks, with the system linked with that on the mainland."

This would be a major step forward for the Hong Kong banking system, which would have developed the capability to deal in other renminbi-denominated financial transactions.

Wong believes this would enable the logical development of Hong Kong into the mainland's financial centre, preparing it for the moment when other renminbi transactions are liberalised in future.

His beliefs are echoed by a Hong Kong Monetary Authority spokesperson, who notes that while Hong Kong will not yet turn into a renminbi offshore centre, "the mainland government has said that Hong Kong will be given priority consideration when the conditions to operate renminbi offshore financial business are met".

Wong feels that "by allowing banks in Hong Kong to operate domestic renminbi businesses (in areas like deposits, remittance, exchange and bank cards)", the banking sector is given the priority as well as the opportunity to prepare itself for further financial liberalisations on the mainland in future.

"Banks will now be able to do renminbi businesses with individuals who travel frequently to the mainland and companies that have close ties with the mainland or deal with mainland tourists," he notes.

"Hong Kong's 'gateway to the mainland' image will also be reinforced as foreign corporations will be attracted to the territory and utilise its banking services."

Moreover, as the Chinese mainland opens up rapidly following the country's accession to the World Trade Organization (WTO), Hong Kong has already positioned itself to take advantage of new opportunities by signing the Closer Economic Partnership Arrangement (CEPA).

Wong believes the main benefits that will accrue to the banking sector under CEPA include:

  • lower entry threshold (for instance, total asset requirement for setting up a branch on the mainland has been reduced from US$20bn to US$6bn)
  • timing advantage (minimum requirement for prior business operation in Hong Kong has been reduced from three to two years)
  • other concessions that build on existing WTO commitments such as the removal of requirements for setting up a representative office before establishing a branch.

In Wong's opinion, "these benefits effectively give banks in Hong Kong a headstart, ahead of foreign competitors, in the race to develop banking business on the mainland".

Quite naturally, small and medium-sized enterprises (SMEs) in Hong Kong stand to benefit substantially from these CEPA-related developments in the banking sector.

"SMEs can be expected to benefit from having more banks from Hong Kong that could look after their banking needs as they gradually build up their presence and renminbi operations [on the mainland] under CEPA," Wong believes.

SMEs which already have operations on the mainland, or those planning to invest there, will be able to enjoy better banking services support on both sides of the border - in short, a one-stop service.

"SMEs will also benefit from smoother cross-border banking transaction flows, allowing them to better manage their businesses with lower costs," Wong adds.

Building business

Hong Kong is moving closer to strengthening the financial and monetary advantages it continues to offer companies and financial institutions worldwide as a gateway to the Chinese mainland.

As part of this exercise, Hong Kong has gained the approval of mainland authorities for banks in Hong Kong to conduct personal renminbi business on a "trial basis".

Clarifying the approval granted by the mainland's State Council, a Hong Kong Monetary Authority spokesperson notes: "The renminbi business will be confined to transactions that facilitate personal spending but do not involve investment and other capital account transactions."

Thus, the renminbi business will cover deposit-taking, exchange, remittances, and renminbi cards:

  • Deposit-taking: Hong Kong licensed banks participating in the renminbi business can offer deposit-taking services to Hong Kong residents, with the interest rates and terms of deposits to be determined by the participating banks.
  • Exchange: Participating banks can allow renminbi deposit accounts to convert the mainland currency into Hong Kong dollars and vice versa. The daily maximum amount that can be exchanged by a person is the equivalent of RMB20,000. Those holding renminbi deposit accounts can exchange a maximum of RMB6,000 or equivalent per transaction. Participating banks are allowed to offer the service to businessmen engaged in retail sales, catering, accommodation and other services involving "personal consumption" to exchange their renminbi receipts into Hong Kong dollars.
  • Remittances: Participating banks can allow renminbi deposit account holders to remit these funds to bank accounts under the same name on the mainland. The maximum daily remittance per person is RMB50,000.
  • Renminbi Cards: Mainland residents can use renminbi debit cards and credit cards issued by mainland banks in Hong Kong. Participating banks or their subsidiaries can also issue renminbi debit cards and credit cards to Hong Kong residents for use on the mainland.


Reducing Risk Across Borders

Reducing the hassle: Hong Kong professionals working and doing business on the mainland should find it easier to buy life insurance and medical care following the introduction of CEPA

The Closer Economic Partnership Arrangement (CEPA) has certainly given the Hong Kong insurance sector something to smile about in the Year of the Monkey.

There are double benefits for the industry, which is one of 18 key services to be included in CEPA. Not only is the sector itself at the receiving end of a very wide range of benefits, but it also stands to support other Hong Kong businesses as CEPA helps them develop and grow on the Chinese mainland.

For example, one key provision allows Hong Kong insurers to meet the requirements for entry to the mainland insurance market by making "strategic alliances" with each other - and with foreign insurers.

But the tough criteria they must meet limit the scope for insurers in the Special Administrative Region (SAR) to take advantage of this provision.

And, even if they decide they want to link up with global players, "the reality is that international companies planning to enter the Chinese market have already done so," comments Clarence Wong, head of economic research and consulting for Swiss Re in Asia.

But what could be interesting, he says, is the possibility that large, regional insurance companies based in Korea, Japan and Singapore might use alliances with Hong Kong firms to gain a foothold on the mainland.

"These companies have expanded fast in the past 10 years and are increasingly considering overseas expansion," says Wong.

Hong Kong insurance commissioner Richard Yuen points to another important benefit. Under CEPA, Hong Kong insurers are now allowed to own up to 24.9% of the capital in a mainland insurance company - up from the 10% limit that still applies to other foreign insurers. This "will help Hong Kong insurance companies invest in mainland insurance companies and explore business opportunities [there]," he says.

Wong explains that insurers and intermediaries in Hong Kong will see CEPA affect business indirectly, too. "CEPA allows a range of professionals to enter the market, but some of them might feel more comfortable arranging insurance in Hong Kong, rather than on the mainland, where certain products are not yet so well-developed," he believes.

Sammy Lui, chairman of the Professional Insurance Brokers' Association (PIBA) - which represents Hong Kong insurance brokers - says the psychological effect of CEPA will be important too.

"A general boost to the economy will benefit the insurance sector indirectly," he predicts. "And, if more Hong Kong professionals are working and doing business on the mainland, they will need more insurance, especially life insurance and medical cover."

Most coverage of CEPA has focused on the benefits for Hong Kong companies, but Lui argues the agreement will work both ways.

"The mainland intermediary market, for example, is very new," he notes. "Exams for insurance agents were introduced only a few years ago, so there is a real need for the expertise and experience that Hong Kong agents can provide."

And the consensus is that individual intermediaries - brokers and agents - will benefit most from CEPA. Individual Hong Kong intermediaries (as well as loss adjusters and actuaries) can now practice on the mainland, providing they pass the relevant exams.

The China Insurance Regulatory Commission recently agreed to make it easier for individual Hong Kong intermediaries to register for the exams, which qualify them to work on the mainland, by allowing them to do so in the SAR.

And Yuen says his office has already obtained from its mainland counterpart "agreement in principle" for a Hong Kong exam centre, allowing Hong Kong agents to sit mainland exams without crossing the border.

The big question for small and medium-sized enterprises (SMEs), however, is whether CEPA will have a greater impact on any particular types of insurance cover.

There is, for example, huge potential in the areas of life insurance and savings policies for individual intermediaries from Hong Kong. Their new access to the mainland market - and to a growing middle class with money to invest - could make CEPA key to developing a savings culture there.

But Wong believes the impact will be stronger on the general insurance side, in "those sectors that are less commodity-oriented" - liability, for example. He points out that this is often a "more difficult" type of insurance to arrange, making "the need for foreign expertise higher".

SMEs in Hong Kong will benefit ultimately because a pool of local intermediaries which is active on the mainland and gaining experience in placing risks there can only be good for Hong Kong firms looking to develop their businesses.

Many will need to insure risks on both sides of the border, making it crucial for their intermediary to be able to arrange cover under both regulatory regimes.

Moreover, cross-border discussions are ongoing. For example, the Hong Kong Federation of Insurers - the trade body representing SAR insurance companies - has requested both a relaxation of the mainland entry requirements for Hong Kong firms and permission for Hong Kong manufacturers to buy cover in Hong Kong for their mainland property.

"It will take time for all the benefits to filter through," concludes Wong. "And, for insurers, a lot will depend on how much other professionals take advantage of the benefits CEPA has to offer."

What does CEPA hold for the HK industry?

CEPA offers several key benefits for local insurance companies, which in turn will provide savings for local SMEs seeking insurance cover on the mainland.

These include:

  • Hong Kong insurance companies and intermediary firms can now form "strategic alliances" among themselves, or with foreign counterparts, in order to meet the requirements for entry to the mainland insurance market. These are:
    - for insurance companies, total assets of more than US$5bn. For intermediary firms, the requirement is substantially less, at US$500m
    - more than 30 years' insurance industry experience
    - one of the Hong Kong insurers in the group must have had a mainland representative office for at least two years
  • CEPA has raised Hong Kong insurers' maximum holdings in mainland insurance companies from 10% to 24.9%. Insurers from any other country are restricted to holdings of no more than 10% each and total foreign investment in any mainland insurer still must not exceed 25%
  • individual Hong Kong insurance intermediaries, loss adjusters and actuaries may sit the relevant professional examinations and practice on the mainland


bullet9.jpg (1215 bytes)Advertising Enquirybullet9.jpg (1215 bytes)Hong Kong Subscription Formbullet9.jpg (1215 bytes) Overseas Buyers Request Formbullet9.jpg (1215 bytes)More Publications