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The Hong Kong Dollar - Renminbi Dual Counter Model: Proceeding Steadily and Progressively

The Hong Kong Dollar (HKD)-Renminbi (RMB) Dual Counter Model (the Model), which has drawn much attention, will be officially launched next week, allowing investors to trade securities issued by the same issuer in both HKD and RMB, and transact across HKD and RMB counters.  This will mark an important milestone in the development of offshore RMB business in Hong Kong.

Some may say that the Model is not a new thing and they may wonder what is the significance of the initiative, as a similar mechanism has previously been implemented for securities products (such as exchange-traded funds) in Hong Kong.  This is only half correct.  The Hong Kong Exchanges and Clearing Limited (HKEX) did establish a mechanism as early as in 2010 to allow the issuance and trading of RMB securities under a “single-tranche, single-counter” model or “dual-tranche, dual-counter” model.  However, the market environment today has changed, with both the liquidity of RMB and the size of RMB liquidity pool reaching an unprecedented level.  Being the world’s largest offshore RMB hub, Hong Kong processes about 75% of the global offshore RMB settlement.  With a solid foundation for further strengthening our offshore RMB business, we are now better positioned to launch the Model at this juncture.

As such, the current-term Government has been actively promoting the issuance and trading of RMB securities as well as strengthening the overall support in this regard with a “three-step” strategy since taking office, with the aim to better realise the potential of using RMB in the stock market. 

Our first step is to facilitate the formation of a dedicated working group comprising regulators and a market operator to conduct an in-depth study on ways to promote the use of RMB in the stock market and address the liquidity problem of RMB counters.  The working group has proposed to improve the trading mechanism of dual counter securities, including the establishment of the Dual Counter Market Maker (DCMM) regime, with a view to enhancing the liquidity and price efficiency of RMB securities by offering buy and sell quotes at RMB counters, so that investors can have the confidence that trading can be carried out at their preferred prices.  Moreover, market makers can conduct arbitrage transactions of the same stock across the two currency counters, so as to minimise the price discrepancies between the two.  The Government then commenced a legislative amendment exercise in relation to stamp duty exemption for specified transactions conducted by market makers, and subsequently secured the Legislative Council’s approval of the relevant ordinance this January, creating favourable conditions for launching the above market maker regime.

The improvement of the mechanism is just a supporting measure.  We also need to ensure the availability of quality RMB‑denominated stocks in the market for investors.  Hence, our second step is to encourage listed issuers to set up RMB trading counters.  In this regard, the Government and the HKEX have been maintaining close and direct communication with listed issuers, briefing them on the strategic significance of dual counters and the actual benefits for them while understanding their needs and providing them with the required support.  With the concerted efforts of various parties, a total of 24 listed companies, most of which are Hang Seng Index constituent stocks with promising turnover, accounting for around 40% of the average daily turnover of the stock market, will set up RMB counters on the launch day of the Model.  Their participation is a vote of confidence for the development of RMB securities in Hong Kong.

Here comes the final step: the rollout of the Model, which will definitely create a “win-win” situation for Hong Kong investors.  If investors holding Hong Kong stocks wish to hold RMB or increase their holdings of RMB, they may do so by directly cashing in their Hong Kong stocks; if those holding offshore RMB wish to invest in Hong Kong stocks, they may conduct the trading without the need to convert their RMB into HKD, thereby reducing the costs and risks of currency exchange.  Various parties in the market are now at the final stage of preparation to ensure the smooth conduct of all trading and settlement activities upon the launch of the Model.

Of course, our work to promote RMB stocks does not end here.  As a matter of fact, since the above trading model is newly introduced, it is anticipated that the share of RMB-denominated transactions in the overall market might not be very significant at the initial stage.  The main objective of launching the Model is to achieve smooth operation, accumulate more experience in key areas such as issuance, trading, market-making mechanism and settlement of RMB stocks in Hong Kong, and encourage market participants to prepare for further development of the RMB securities market.  We will continue to make greater efforts to promote offshore RMB business on different fronts, including collaborating with regulatory bodies to step up preparations for including RMB trading counters in Southbound Trading of Stock Connect for early implementation.  This will provide a new catalyst for the issuance and trading of RMB stocks in Hong Kong, enabling us to give fuller play to our function as a global offshore RMB business hub as stated in the National 14th Five-Year Plan and assist our country in steadily promoting the internationalisation of the RMB in a prudent manner.

13 June 2023