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Cheung Kong, Hutchison to Buy BOC Shares
2002/07/10

Cheung Kong (Holdings) Ltd. and Hutchison Whampoa Ltd., two companies owned by billionaire Li Ka-shing, will buy shares in BOC Hong Kong (Holdings) Ltd., Li said.

The two companies will buy a ``substantial amount'' of shares in BOC Hong Kong, more than those Standard Chartered Plc has agreed to purchase, Li said at a press briefing. Standard Chartered is paying $50 million for less than 2.5 percent of BOC Hong Kong's stock being sold.

"We are confident in the Bank of China," Li said.

BOC Hong Kong, the listing company of Bank of China (Hong Kong) Ltd., a unit of China's biggest foreign-currency lender, is selling as much as $2.8 billion of shares in Hong Kong this month. The company began international marketing of the shares Monday in Singapore. The lender will price the shares July 22 and list in Hong Kong on July 25.

"It's not appropriate for us to comment during the prelisting period,'' Clarina Man, spokeswoman at Bank of China (Hong Kong), said in response to Li's purchase plans.

Spokesmen for sale arrangers Goldman Sachs Group Inc. and UBS Warburg also declined to comment.

Hong Kong as an Offshore Centre for the Renminbi
2002/05/12

"The trend is for the renminbi to become fully convertible. But before the renminbi is convertible, Hong Kong will be given priority to attempt any new product launches."

Dai Xianglong
Governor of People's Bank of China
18 February 2002

In February, Governor Dai Xianglong of the People's Bank of China responded favorably to the question of banks in Hong Kong accepting renminbi deposits during a visit to the Special Administrative Region (SAR). As the renminbi is yet to be freely convertible, the initiative, if realised, would make the SAR the natural choice for offshore centre for the renminbi in the interim. Already, the renminbi is increasingly accepted for payment at local retail outlets with the rise in Mainland travelers in recent years. It is a matter of time before the renminbi becomes freely convertible. An offshore centre in the SAR would not only facilitate the evolution to its full convertibility but also endorse Hong Kong's position as a leading international financial centre of China and the Asia-Pacific Region.

RMB Offshore Centre

Since the late 1970s when China opened up its economy for foreign trade and investment, capital flows in and out of China have increased rapidly. Total merchandise trade increased tenfold in US dollar terms between 1981 and 2001. Foreign direct investment (FDI) inflows totalled USD350 billion during 1993-2001, accounting for more than half of the FDI poured into Asia outside Japan during the period. China's capital outflow, albeit less noticed, has also been on the rise, making China the world's eighth largest FDI provider in the mid-1990s.

China's economic realignment with the world has given rise to demand for the renminbi and this demand will grow as the country's economic prowess becomes increasingly visible on the international stage. A World Bank report forecasts that mainland China's share of world exports would double from 3.5% in 1999 to 7.3% by 2005. China's pledge to gradually open up its services and financial sectors to foreign players upon its World Trade Organization (WTO) entry would in particular create demand for the renminbi. Participation of foreign investors in the domestic equity market as well as insurance and fund management industries is being gradually liberalized, and the renminbi business opened up to foreign banks.

China abolished all exchange control on current account transactions in 1996, in a bid to facilitate increasing external trade and investment. However, the renminbi is still not freely convertible into other currencies as China has maintained exchange control on capital account transactions. Approval is still required for changing the renminbi into foreign currencies for acquisition of foreign assets or for repatriation of funds. Travelers are allowed to carry a maximum of RMB6,000 cash when leaving the Mainland.

As is the case for most developing economies, capital control is essential to protect the Mainland financial system from excessive capital flows. Also, the unpredictable and probably erratic behavior of China's external balances in the initial years of its WTO entry would make China cautious in liberalizing its capital control.

An offshore currency market would inevitably emerge if the pace of capital account liberalization is not synchronized with the growth of external demand for a currency. For instance, the emergence of the Eurodollar market in the 1950s was the response to the reluctance of ex-Socialist countries to place their US dollars back into the United States for fear that their assets would be confiscated by the US government. US residents' shift of US dollars offshore to circumvent the interest rate ceiling imposed on domestic US dollar deposits since the 1930s also contributed to the growth of an offshore US dollar market in Europe.

The euroyen businesses transacted in overseas financial centers such as Hong Kong and Singapore are another case in point. The rapidly rising yen and Japan's huge current account surpluses in the 1970s, a result of its highly competitive manufactured products in the world market, prompted its companies to relocate their processing plants to low-cost areas in other parts of Asia. The increasing yen circulation abroad coupled with the policy of maintaining tight restrictions on Japanese residents opening offshore yen accounts or engaging in foreign exchange transactions gave rise to offshore yen transactions. China's economic development and the pace of liberalising exchange control are likely to lead to similar demands for an offshore renminbi centre.


One Country, Two Currencies

Hong Kong has been in the forefront in the renminbi's circulation outside the Mainland given the deepening economic integration between the two places. Bilateral trade between Hong Kong and mainland China climbed from HKD501 billion in 1991 to HKD1,228 billion in 2001, while cross-boundary passengers increased by 180% to over 56 million during the same period. The sizeable flows of people and goods between the two places have led to significant demand for the renminbi outside the Mainland as well as increasing circulation of renminbi notes in Hong Kong. Similarly, the Hong Kong dollar is also popular in the Mainland and a recent research work has suggested that currency substitution probably exists between the Hong Kong dollar and renminbi in South China.

Despite the reunification in 1997, Hong Kong and the Mainland have remained two distinct currency regimes. Under the principle of "one country, two systems", Hong Kong essentially acts as a special currency regime in China running on free market principles with its own currency. On the other hand, the Mainland has continued to implement capital control to maintain its currency and financial stability.

Yet there exists a delicate relationship between the renminbi and the Hong Kong dollar as both are linked to the US dollar, although in different ways. The Hong Kong dollar has been pegged to the US dollar through a currency board system since 1983, while the exchange rate of the renminbi has been kept within a tight range of the US dollar in the past eight years even in the midst of the Asian financial crisis. The tripartite relationship among the renminbi, the Hong Kong dollar and the US dollar is unique and conducive to the development of an offshore centre for the renminbi in Hong Kong.

Over the past decade, Mainland enterprises have made use of Hong Kong's eminent financial status in the country to gain access to the global capital market through Hong Kong's stock market. In the past 10 years, the bulk of Mainland enterprises' foreign equity capital has been raised through Hong Kong in the form of H-shares of state-owned enterprises or through "red-chip" companies. Thus, Hong Kong has become a major conduit for overseas investments into the Mainland.

Hong Kong -- A Natural Offshore Centre for the RMB

The proposal for banks in Hong Kong to accept renminbi deposits can pave the way for Hong Kong to become an offshore centre for the renminbi and extend its role as a key financial centre. While the initial concept appears to focus on letting local banks absorb the renminbi notes circulating outside the Mainland as deposits, a more meaningful and full-fledged business of renminbi deposits must include allowing Hong Kong dollar deposits to be switched into renminbi deposits, and vice versa.

Hong Kong's unique position makes it a natural and preferred choice for an offshore centre for the renminbi. Among the world's top 100 banks, a total of 79 have a presence in the territory. Hong Kong's currency and banking systems are separately managed from those of the Mainland, yet Hong Kong is a SAR of China. However, the main concern lies in the different pace of exchange control between Hong Kong and the Mainland, since accommodating full-fledged renminbi deposits in Hong Kong is conditional on a relaxation of China's current exchange control practices.

As the Hong Kong dollar is freely convertible into other currencies and there is no capital control in Hong Kong, an offshore centre for the renminbi in Hong Kong would in essence affect Mainland's exchange control in the capital account. The major challenge therefore is to find a means of relaxing the Mainland's capital control with respect to Hong Kong only.

Some proposed capital market reforms currently under consideration by the Mainland government virtually touch on the same issue. For instance, the Qualified Domestic Institutional Investors (QDII) scheme, which would allow Mainland investors to invest in Hong Kong's stocks in a controlled manner, and the Chinese Depository Receipts (CDR) scheme, which would enable Hong Kong-listed companies to raise funds in China's stock market, involve transactions in both the Hong Kong dollar and the renminbi. Exchange control on capital account transactions would be an unavoidable issue when China further deregulates and opens up its financial markets.

The technical complexity of the relaxation of capital control for making renminbi deposits in Hong Kong possible should not be underestimated. Such relaxation would involve managing money flows between Hong Kong and the Mainland without jeopardizing the Mainland's objective of maintaining financial and currency stability. It is unlikely that the control over capital account convertibility would be totally liberalized in the next few years, as the Mainland government has concerns about financial stability. In the circumstances, any move towards making Hong Kong an offshore renminbi centre needs to complement the development of the Mainland's financial and currency systems.

Conclusion

If an offshore centre for the renminbi were to be realized in Hong Kong, it would be probably the most unique offshore centre ever. After all, the tripartite relationship among the renminbi, Hong Kong dollar and US dollar is also distinctive. In this light, the technicalities involved should not be underestimated. As the exchange control over the capital account is unlikely to be dispensed with shortly, the challenge would be setting up an offshore renminbi centre compatible with the Mainland's capital control rules in the interim. To the Mainland, it is essential that the proposed offshore centre would not upset the timetable of liberalizing the currency, giving rise to undesirable consequences.

Pearl River Delta Consumer Market
2002/03/24

Following its WTO accession, China is set to gradually relax or remove the restrictions on consumer goods imports. Foreign investors will gain greater access to domestic sales and distribution in the mainland market. With continued economic growth and the people's rising income, China is a huge consumer market. Given the sheer size of the market, where should interested Hong Kong companies start? The Pearl River Delta (PRD) region is a good entry point for those planning their first forays into the China market. This series looks at the current situation in the PRD consumer market and what distribution channels are available for domestic sales. It contains analyses from TDC economists, multimedia footage highlighting the key findings of a TDC research report, as well as interviews with a department store manager and experienced Hong Kong businesspeople in the PRD region.

It is the season to be jolly - jolly prosperous, if you are in the festive decoration business in Wuhan. The approach of the Spring Festival has imbued local people with a sense of the coming festivities, and traditional decorations are taking the fancy of many.

There have been vigorous sales of decorations in shopping malls, supermarkets and markets, mainly for trinkets and small items. Red lanterns, decorative firecrackers, Chinese knots and decorative paintings of the Chinese character for "fortune" are all extremely popular. These have become the "must buy" items for celebrating the Chinese New Year.

In the past, people were only concerned about stocking up food and drink for the Spring Festival, but now they are keen to create a festive mood in the home. People in the trade agree that the demand for festive decorations has fueled the growth of a lucrative holiday-season market.

Out of feelings of nostalgia, more and more people are choosing traditional festive decorations - but their decorations also convey auspicious messages and cater to the urge to spend.

Decorations for celebrating the Spring Festival.

Chinese knotting is an age-old folk art. Silk threads are tied by hand into basic knots of different patterns with auspicious meanings, and these basic knots of different meanings are then tied to other decorative objects to make pieces of beautiful artwork rich in cultural significance.

Thousands of varieties of decorative knots are available in the market. There are "plain sailing" and "safety" knots for drivers; "prosperity" knots with chilli, fish and prawn motifs; "romantic" knots with heart-shape patterns; "fortune" knots tied to ancient coins; "happiness" knots featuring the double-happiness character; and "longevity" knots tied to pictures of the crane and the pine.

These knotted decorations come in different sizes. Some are two to three metres long and can be hung as good luck charms. Others are made into earrings, bracelets, rings and necklaces, and worn as fashion accessories.

Chinese knots are not very expensive. Small items cost only a few yuan. Even larger good luck charms cost no more than Rmb100 to Rmb200 (HK$94.3 to HK$$188.6). They make good presents and ornaments.

Auspicious Chinese knots for the New Year.

There has in fact been a mushrooming of shops selling these decorative knots in Wuhan. The proprietor of one knotting art shop says he has opened five branches in the city since he entered the market more than a year ago. He is now netting Rmb10,000 (HK$9,433) daily on average, with customers from all social strata, including foreign tourists.

The popularity of Chinese decorative knotting has fueled the growth of other related businesses. Courses on knotting arts are very popular among young people. There are even those who make a living out of teaching knotting at "toy bars". Many people, especially young women, are learning this trendy art out of curiosity or for fun. Most learn Chinese knotting not because they want to acquire a new skill with which to make a living but because they want to learn how to express their best wishes through the art of knotting.

Most of the decorative knots sold in the market come from the northern provinces. Some special knots are even patented or have their own trademarks. Many production enterprises have already established extensive marketing networks and the scale of their production has been steadily expanding. Dozens of books on knotting are selling extremely well.

from special correspondent Yan Hua, Wuhan

• The Chief Executive announced in his Policy Speech 2001 a number of government initiatives to build up the territory for a prosperous future. Education is top on the agenda, plus other measures to improve the business environment of Hong Kong, and ways to relieve the economic hardship.
• Real GDP fell by 0.3% in the third quarter of 2001. The government has revised downward its forecast of real GDP growth for 2001 from 1% to zero.
• Foreign exchange reserves amounted to US$ 112.3 billion as of the end of November 2001.
• Retail sales fell by 0.8% in value, yet grew by 1.7% in volume in the first eleven months of 2001.
• Unemployment rate edged up to 6.1% for the October-December period of 2001.
• Consumer prices, in terms of CCPI, declined 3.6% in December 2001.
• The stock of inward direct investment stood at US$ 404 billion at the end of 1999, up 80.6%.
• The number of tourist arrivals grew by 5.0% in the first eleven months of 2001.
• In 2001, total exports and imports fell by 5.8% and 5.4% respectively.
• The best lending rate was reduced to 5.125% following the US rate cut in December 2001.