As China Accelerates Its Efforts to Internationalize Its Currency And Replace The U.S. Dollar, The Yuan-Denominated Shares On The Hong Kong Stock Exchange Are Introduced

  • 20-June-2023

As part of a new program that the city's stock exchange started on Monday, foreign investors in Hong Kong can now buy shares that are worth Chinese renminbi.

Tencent, Alibaba, Meituan, and AIA Group are just a few of the major Chinese and Hong Kong companies that can now trade in both the Hong Kong dollar, which is the city's local currency, and the yuan. It is possible to freely exchange shares in one currency for shares in another currency. The companies participating in the "HKD-RMB Dual Counter Model" are worth approximately $1.5 trillion, or more than a third of the Hong Kong stock market.

The city's stock market is run by Hong Kong Exchanges and Clearing (HKEx), which hopes that more yuan-denominated trading will boost the city's sluggish trading volumes. HKEX anticipates bringing the scheme to mainland China later this year, even though it is currently only open to domestic and international investors.)

Nicolas Aguzin, CEO of HKEx, stated in an interview with CNBC on Monday that mainland retail investors would experience a "huge difference" if they could "transact in an instant basis in renminbi."

However, Aguzin mentioned a further advantage of the new HKEx program: that it would "continue to contribute to the internationalization of the renminbi"

On Monday, the Hang Seng Index of Hong Kong fell just over 0.6 percent. After a brief rally following China's reopening ended as the country's recovery lost steam, the index has lost 1.2% so far this year.

The global yuan

China has worked for more than a decade to promote the renminbi as a global alternative to the US dollar.

However, the yuan's international standing has been enhanced by Russia's invasion of Ukraine. Moscow has been forced to use other currencies to conduct international trade as a result of U.S. sanctions against the country, which include freezing the country's reserves of U.S. dollars.

Bloomberg reports that earlier this year, as more Russian businesses bought and sold goods on the Chinese market, the yuan surpassed the US dollar as Russia's most traded foreign currency. Even more nations, including Bangladesh and Pakistan, are doing business with Russia using the yuan. Hong Kong hopes that some of these nations will now invest in the city's new yuan-denominated shares with their Chinese currency holdings.

In February, China's currency was used in 4.5 percent of trade, up from less than 2 percent a year earlier. That is close to the proportion of euro-based trade.

The safe reputation of the United States dollar may also be being tarnished by recent issues in the country, such as the heated debate over raising the borrowing limit, which put the country at risk of its first ever default.

"International confidence in the US dollar has been damaged by the turmoil of the U.S. banking industry, problems with government debt, and huge deficits being monetized," Hong Kong's financial secretary Paul Chan wrote in a blog post last week about the launch of the "HKD-RMB Dual Counter Model."

(The Hong Kong dollar is used as the base for the local currency. In the past, Chan has strongly rejected calls to unpeg the two currencies.)

The yuan is also being considered by central banks as a way to diversify their reserves. According to a UBS survey, 85 percent of central bank managers either invested in the Chinese currency or expressed interest in doing so in the previous year.

In any case, the yuan has quite far to go until it dissolves the predominance of the U.S. dollar. Foreign exchange and cross-border transactions are strictly restricted in Beijing.

Toward the finish of 2022, 54% of unfamiliar trade saves were held in U.S. dollars — an extent generally unaltered from the finish of 2021, as per information from the Worldwide Financial Asset.

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