China’s gradual internationalisation of its currency will shift to its next leg on Monday when about two dozen Chinese companies start trading in their home currency in Hong Kong’s stock market.
Hong Kong stocks such as Alibaba and Tencent are among the 24 stocks which will be priced and traded in both yuan and the Hong Kong dollar under the Dual Counter Model on the Hong Kong stock exchange from Monday.
The scheme targets overseas investors with yuan holdings initially, but will later include mainland investors via the Hong Kong-China Stock Connect link-up. Offshore yuan deposits in Hong Kong alone are estimated at some USD 117 billion.
Fund managers say the step reflects Beijing’s desire to expand the use of yuan outside China and provide another avenue for yuan-denominated investment, thus reducing the risk of capital outflows chasing higher-yielding currencies such as the US dollar.
“China is pushing yuan internationalisation to avert geopolitical risks and reduce reliance on the dollar, and for that purpose, you need wider use of the Chinese currency,” said Ding Wenjie, strategist of Global Capital Investment at China Asset Management Co.
Ding said the scheme is a major milestone and expects the model to be expanded beyond stocks to bonds and even alternative assets, boosting overseas asset pools denominated in yuan.
The initiative comes amid a steady stream of bilateral yuan-denominated deals China has struck with trading partners, from Chinese oil purchases in the Middle East to commodities trade with partners from Brazil to Russia. Beijing has retained close ties with Moscow despite the invasion of Ukraine.
The US dollar remains the dominant global currency, accounting for 42 per cent of global payments. The yuan’s share is just 2.29 per cent but is up from 1.95 per cent two years ago.
A significant breakthrough in China’s efforts to promote the use of the yuan came this month when Pakistan paid for its first government-to-government import of discounted Russian crude oil in yuan.
“When a currency is internationalised, it’s not only used in trade, physical goods, or services. It also has to be parked in investment vehicles,” said Dong Chen, Head of Asia Macroeconomic Research at Pictet Wealth Management.
For foreign investors with yuan holdings, “buying shares in Hong Kong without really going into mainland China will be a much, much easier way to park your holdings of this currency,” he said.