Since last year, I have been telling my students in Lingnan University’s Master of Science program in International Development Economics that the renminbi (RMB) will become a safe-haven currency of choice for international investors. In the recent past, the Japanese yen, the US dollar, and the Swiss franc have served as safe-haven currencies for different reasons.

The yen has served as a safe-haven currency because of the huge quantity of assets Japan owns overseas, among other reasons. When there is a perceived financial crisis, Japanese owners repatriate some of those assets to Japan. Speculators take a free ride expecting that yen to appreciate.

The US dollar has served as a safe haven because it is the only universally recognized “world currency”. Whenever there is a crisis, international investors who are averse to risk have bought US Treasurys because they are extremely liquid and bear interest. Even when a crisis happens in the US, such as the Lehman Brothers collapse, investors have bought US Treasurys in a haste, leading to a decline in US Treasury bond yields. The US became the only country that can borrow more cheaply when it is financially troubled.

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The Swiss franc has served as a safe-haven currency because Swiss banks used to enjoy a reputation for keeping the identities of their customers secret and beyond the reach of the radar of sovereign regulators.

However, the favorable factors that supported their roles as safe-haven currencies have changed. Japan has lost its appeal as the destination to “park” international savings because the currency has weakened so much under a need to preserve Japan’s competitiveness as an exporter. The US has lost its appeal as safe-haven currency because of its surging budget deficit and federal debt at a pace that is clearly unsustainable. The collapse of Silicon Valley Bank last year shocked the world into realizing that marked-to-market valuation means that banks that hold a lot of US Treasurys unwittingly take on huge risks because the value of their assets could plummet to below that of their liabilities. More recently, the revised Anti-Money Laundering Act in Switzerland, which went into force on Jan 1, 2023, requires financial intermediaries to comply with stricter due diligence duties.

With traditional safe-haven currencies increasingly falling out of favor, the world is desperately looking for a new financial bolt hole. Against the background that China has already become the world’s No 1 exporter, and that China has never had a single year of negative growth since 1976, and with the smallest central government debt to GDP among all the countries represented in the IMF Special Drawing Right, and the continual opening-up of the economy, the RMB is now the most favored candidate for the preferred safe-haven currency.

Notwithstanding the popularity of the “Peak China” narrative among Western commentators, China is on course to reach its target of 5 percent growth this year. This will be about twice the rate of growth of the US. While some China critics were overjoyed at seeing that the nominal GDP between the US and China had widened, with the recent strengthening of the RMB against the US dollar, the gap is sure to narrow significantly by the end of this year.

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With the RMB serving as the preferred safe-haven currency, Hong Kong is sure to benefit as the world’s top RMB offshore center. Hong Kong was just rated as the World’s No 3 global financial center in the Global Financial Centers Index (GFCI 36), ahead of Singapore and just behind New York and London. However, in four out of five areas of competitiveness, Singapore is ahead of (business environment, infrastructure, financial sector development, reputational and general) or ranked on a par with Hong Kong (human capital). Moreover, in four out of eight industrial sectors (professional service, government and regulation, fintech, and trading), Singapore is also rated ahead of Hong Kong. It is surprising that Hong Kong is ahead of Singapore by two points (749 vs 747), when it is just one point below that of London (749 vs 750). It appears to me that Hong Kong’s role as the world’s top RMB offshore center is the key factor behind Hong Kong’s strength, which covers banking, investment management, insurance and finance.

Hong Kong enjoys a deep pool of liquidity, efficient financial infrastructure, and a multitude of cross-border portfolio flow channels. It offers a wide range of RMB financial services, including clearing and settlement, financing, asset management, and risk management. In addition, the RMB Real Time Gross Settlement system allows market participants from all over the world to handle RMB transactions with the Chinese mainland and among offshore markets efficiently. These are all unique advantages on which Hong Kong must capitalize on to bring in new RMB-denominated financial products, as well as other new products that can help international investors diversify their currency exchange risks.

I have introduced my World Currency Unit idea in this column before (June 1, 2023). I am glad that Banking Today, issued by the Hong Kong Institute of Bankers, carried a feature article on this subject in its latest issue, in July/August 2024.

The author is an adjunct research professor at Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute and the Economics Department, Lingnan University.

The views do not necessarily reflect those of China Daily.