Hong Kong well placed to serve as an engine for boosting e-CNY use in international trade, experts say
Eight years after China began creating its central bank digital currency, the Hong Kong Special Administrative Region is poised to become a global crypto hub with further policies and infrastructures rolled out. The digital yuan could become the most active currency in the SAR to settle international trade.
The digital yuan, or e-CNY, is fiat currency in a virtual form issued by the central bank, the People’s Bank of China (PBOC). As a forerunner in the global race in testing digital currency, e-CNY research in China started in 2014. A pilot program kicked off in 2019 involving use of the virtual unit for some brick-and-mortar consumption, receipt of pension subsidies and for expenditure on campuses.
The business took a big leap forward later as 23 Chinese mainland cities adopted the digital yuan, covering nearly one-fifth of the mainland’s population. The value of transactions soared to about 100 billion yuan ($13.9 billion) as of Aug 31 this year, taking the lion’s share of the world’s e-currency transactions.
The digital yuan is not confined to the domestic market — it is all about going global. A white paper released by the PBOC last year tracked the nation’s progress in the research and development of e-CNY, saying it will “explore (the digital yuan) in improving cross-border payments”.
The PBOC took part in the world’s largest cross-border multicountry payment trial “mBridge” project over a period of six weeks this year.
The Hongkong and Shanghai Banking Corporation Ltd is one of the participants using e-CNY in the project in Hong Kong. Lewis Sun Lei, global head of domestic and emerging payments, global payments solutions, at HSBC, said the mBridge project “shows that CBDCs are a viable means to provide real-time cross-border payments and foreign exchange transactions that are low in cost, high in speed, less complex and more transparent”.
Guangdong-based TCL Technology, one of HSBC’s clients, said in a statement that “Using mBridge to proceed transactions can help to eliminate additional charges by a correspondent bank, and with a faster payment processing.”
Oriol Caudevilla, board director at the Global Impact FinTech Forum, noted that one of the major reasons for developing the digital yuan is to promote its cross-border adoption.
“At the end of the day, one of China’s main objectives is to convert some US-dollar-denominated exports into yuan-based exports. Therefore, it’s in China’s interests not only to make the digital yuan an effective domestic tool for consumers in making retail payments, but also to augment the yuan as a payments currency in the global financial system,” Caudevilla said.
However, as promising as the future looks, there is an elephant in the room before e-CNY can stride its way across the world. With the mainland’s capital controls still in place, how far and fast can Hong Kong claim its promised land in the burgeoning cryptocurrency financial industry?
Judy Chen Yingyin, senior researcher at Hong Kong-based think tank Our Hong Kong Foundation, said she expects technological upgrades, which can provide useful tools to monitor capital flows, to help regulators in further easing capital controls. “Capital control (on the mainland) does not mean suffocating its flow,” she explained. “It’s about ensuring transaction safety and sustaining a stable financial system.”
The digital yuan, as one of the central bank digital currencies, is designed to give the central bank a level of visibility and control that real cash does not provide.
On the other hand, the gravitational pull of the US dollar is palpable under the sheer influence of global economic and trade relations as the greenback, pegged to the currencies of more than 65 economies, is the most traded currency worldwide. However, its recent relentless strengthening, along with the US barring financial transactions with Russia’s central bank, has sent monetary ripples across the globe.
To hedge the risks of geographic tensions and economic recession, more countries are thinking of diversifying their foreign currency reserves, offering tremendous opportunities for renminbi internationalization.
In a recent research paper posted on the website of the Carnegie Endowment for International Peace — a nonprofit international affairs think tank — Robert Greene, a US scholar focusing on Chinese financial-sector trends, noted that many Southeast Asian countries, including Singapore, Malaysia, Indonesia and Thailand, are stepping up efforts to reduce usage of the US dollar.
The PBOC signed a memorandum of understanding with Laos’ central bank in September to set up renminbi clearing arrangements to promote investment and cross-border trade using the Chinese currency.
Harvey Chan, business development director at Hong Kong-based e-payment solutions provider Payment Asia, said he believes the inherited advantages of e-CNY endowed with financial technology, which allows faster and more efficient cross-border settlements, as well as lower exchange-rate costs, can inject new blood into renminbi internationalization.
In his view, economic prowess influences the decision of China’s trading partners to use the digital yuan, with enormous cost savings for foreign enterprises in doing business with the country.
For instance, using electronic currency in trade between Singapore and China could lead to estimated savings of between S$16 billion ($11.4 billion) and S$24 billion, global consultancy firm Oliver Wyman said. This represents 3 to 5 percent of the Lion City’s GDP “due to fee savings from lower transaction costs and liquidity savings to the real-time treasury, and incremental volumes from lower fees or more liquidity”.
As the world’s largest exporter and a manufacturing powerhouse, China’s trade surplus continued to widen in October, hitting $85.15 billion, despite market uncertainties, compared with $79.39 billion in August, according to China Customs data.
Hong Kong was the mainland’s second-largest export market, taking up 10.4 percent, or $351.1 billion, of mainland’s total exports last year.
Given the favorable external and internal conditions, Hong Kong is likely to become a vibrant center for using the digital yuan in international trade, with its competitive advantages as the world’s largest offshore renminbi center and the principle of “one country, two systems”.
Hong Kong enjoys free trade and capitalism different from that of the mainland. On the opening day of 2022 Hong Kong Fintech Week, which was held from Oct 31-Nov 4, the city announced a new regulation for easing restrictions on digital assets, in stark contrast to the mainland’s approach to cryptocurrencies.
Renminbi deposits in Hong Kong currently exceed 800 billion yuan. According to the Society for Worldwide Interbank Financial Telecommunications, more than 70 percent of global offshore renminbi payments are processed in Hong Kong. The PBOC upgraded a currency swap facility with the SAR in July to a permanent agreement.
The application of e-CNY in the mainland’s clearing house for international transactions — the Cross-Border Interbank Payment System — would bypass the US-dominated payment network SWIFT, which will gradually diversify global settlements, said Chan from Payment Asia.
The PBOC’s digital currency research institute and clearing center established a joint venture with SWIFT last year. As of September, the US dollar accounted for about 42 percent of payment instructions transmitted by SWIFT in terms of value, compared with 2.44 percent for renminbi — up from 2.31 percent the previous month — according to SWIFT.
Antonio Fatas, economics professor at business school INSEAD, said the US dollar still dominates global monetary flows, and its status will remain for quite a long time due to the size of the US economy, its financial markets and its openness to capital flows.
In the second quarter of this year, the greenback accounted for about 60 percent of the world’s foreign exchange reserves — well above renminbi’s 2.88 percent — according to the International Monetary Fund.
In Hong Kong, the use of digital yuan in retail payments is already faster than that in global trade. In September, the Hong Kong Monetary Authority — the city’s de facto central bank — said the e-CNY technical trial had entered its second phase, focusing on the use of the Faster Payment System to top up the e-CNY wallet. The FPS is a payment platform that enables people to transfer money online among various banks.
The number of banks participating in the trial’s second phase has since grown from one to four — Bank of China (Hong Kong), HSBC Hong Kong, Standard Chartered Bank Hong Kong and Hang Seng Bank. Their employees and merchants were invited to take part in the process.
Colin Pou Hak-wan, executive director of financial infrastructure at the HKMA, said, “We will invite more e-CNY operating institutions and local banks to join in the test to facilitate the digital yuan’s use by Hong Kong residents on the mainland in the future.”
