Hong Kong is set to continue capitalising on offshore yuan funding opportunities after “dim sum” bonds and loans – offshore debt denominated in the yuan – grew exponentially in 2023, regulators said.
Last year, dim sum bonds issued in Hong Kong increased by 65 per cent to 550 billion yuan (US$76 billion) compared to a year earlier, while the total outstanding yuan loan figure rose 130 per cent year on year to 441 billion yuan, Kenneth Hui, executive director at the Hong Kong Monetary Authority (HKMA), said in a keynote speech at the Global Loan Market Summit in Hong Kong on Tuesday.
Borrowers and issuers have increasingly opted for local currency financing to mitigate foreign-exchange risks and to diversify rather than to rely on foreign currency, he said.
“In this context, we see that the use of yuan in cross-border trade and investment has been gaining traction in recent years,” Hui said.
The gradual opening up of the mainland Chinese capital market, which can provide more yuan-denominated assets for international investors, and cheaper funding costs in the yuan compared with the US dollar, due to several interest rate hikes by the Federal Reserve since March 2022, were behind this growth, he added.
Hong Kong is uniquely positioned to support offshore yuan needs, Secretary for Financial Services and the Treasury Christopher Hui Ching-yu told the conference.
“Being the world’s largest offshore yuan hub, we strive to make good use of our distinctive strengths to support and facilitate more issuers with yuan funding needs to issue bonds in Hong Kong,” Christopher Hui said.
The city has extended the coverage of profit tax exemptions to debt instruments issued in Hong Kong by all mainland local governments at any level, he added. Issuances by the People’s Government of Hainan Province and the Shenzhen Municipal People’s Government have enjoyed these exemptions.
The Qualifying Debt Instrument (QDI) scheme, introduced in 1996 to provide concessionary tax treatment on interest income and trading profits derived from qualifying transactions, has also helped boost bond issuances in Hong Kong.
“Since the implementation of the latest enhancement measures, with effect from April 2018, the number of QDIs in Hong Kong has grown significantly,” Christopher Hui said. “As of the end of 2022, there were close to 1,600 QDIs and around 90 per cent of them were issued after April 2018.”
With an eye on the huge opportunities for yuan financing, the HKMA and the People’s Bank of China last month announced a series of measures to deepen financial cooperation between Hong Kong and the mainland.
These measures include expanding the list of eligible collateral for the HKMA’s yuan liquidity facility to include onshore sovereign bonds, further opening up the onshore repurchase agreement market to all foreign institutional investors, and promoting cross-border credit referencing to facilitate companies’ cross-border financing activity.
“To help us better capture the growth potential of yuan financing, we are taking a number of steps,” said the HKMA’s Hui.