On September 25, the Senate Committee on Foreign Relations and the Committee on Foreign Affairs of the House of Representatives in the U.S. voted to pass the Hong Kong Human Rights and Democracy Act, which has prompted the Chinese foreign affairs department to express its anger and opposition. Whether or not this bill is eventually passed, it shows that the U.S.'s intervention in Hong Kong will be strengthened further, and it also means that Hong Kong will become a "geo-battlefield" for strategic competition and friction between China and the United States. In addition to political and social influences, the bill requires the U.S. State Department to certify Hong Kong's autonomy every year to determine on the maintenance of the special status and treatment currently enjoyed by Hong Kong, including its status as an independent customs territory. This has brought great uncertainties to the Hong Kong economy. It will not only have an impact on Hong Kong's entrepot trade but also on the island as a financial center, as well as on the process of RMB internationalization.
ANBOUND has previously pointed out that this action of the United States is like hanging the sword of Damocles over Hong Kong, with the possible goal of dismantling Hong Kong's status as an international financial center, especially as an offshore RMB trading center. Since the beginning of this year, the trade frictions initiated by the United States has greatly deteriorated the global trade environment. This has already caused a major impact on Hong Kong as a free port. Hong Kong's exports, the Hong Kong dollar exchange rate, as well as it's stock market and the real estate market have all felt the impact. Unlike trade, financial transactions are more focused on market stability and risk control. If the market's position cannot be determined, investors will then be encouraged to withdraw to a less risky market. This will undoubtedly affect Hong Kong's development as China's largest offshore RMB trading center, and it will also have an impact on the internationalization of the RMB and China's financial opening.
At the moment, Hong Kong is China's largest offshore trading center for the Chinese yuan (renminbi, RMB), reaching a scale of more than RMB 600 billion. Hong Kong's RMB deposits also reached RMB 615 billion, with the total amount of cross-border trade settlement RMB remittances has also reached the scale of RMB 400 billion. Hong Kong is also the world's largest offshore RMB foreign exchange and over-the-counter (OTC) interest rate derivatives market, and the largest offshore RMB bond market. Hong Kong has also established a normal mechanism for issuing central bank bills. Therefore, Hong Kong's financial markets, especially its offshore RMB trading market, are becoming targets for the United States.
The changes in the Hong Kong issue indicate the urgency of ANBOUND's proposal that the internationalization of the RMB should be considered in the development and competition of geo-economy and geo-currency. From the perspective of Macro Finance, the intensification of the Hong Kong issue can also be seen as a manifestation of currency-based geopolitical competition. This is even after the current global "currency competition" has emerged from the shift of the single monetary system of the U.S. dollar towards a multi-geographical monetary system. In his judgment on the trend of the RMB as a geo-currency in the global economy and finance, ANBOUND's chief researcher Mr. Chan Kung suggested that under the current global economic and financial development trends, the internationalization of the RMB, like China's foreign trade and foreign investment, will encounter great geographical resistance. The United States has intensified the frictions involving Hong Kong's offshore RMB center as a bargaining chip, and this is the embodiment of a geopolitical currency conflict. It also means that the competition between the United States and China is expanding from a trade conflict to a financial war and that Hong Kong is a key friction point of this geo-conflict.
Under such circumstances, the development of the RMB internationalization will also be closely related to the geopolitical environment faced by China. The RMB internationalization will need to "go out" from Hong Kong, and take on a bilateral nature. This should also be a move for the RMB to transform from being concentrated to being dispersed and move from concentration to diversity. This will inevitably require a change in Hong Kong's current RMB offshore market structure. Looking from a geo-perspective, the markets of the regions covered by China's Belt and Road Initiative (BRI) will remain the main area for the future RMB internationalization. However, this region is also facing suppression and interference from the U.S. Hong Kong has the potential and advantages of becoming a regional hub in the establishment of close links between finance and trade in Southeast Asia and the BRI countries, but under the context of possible sanctions by the United States, Hong Kong's status has currently become murky and the outcome unclear.
The internationalization of the RMB requires more geo-support. Due to its special status, Hong Kong has been able to establish special contacts with both the Mainland and overseas nations simultaneously. However, after becoming a new "battlefield" between the United States and China, the passage of Hong Kong to developed regions such as Europe and the United States has been hampered. For the Mainland, the linkages with financial markets in developed countries need to be considered more from the perspective of financial markets, and they cannot be expected to use special relationships in order to obtain special arrangements. Offshore RMB trading also needs to be multi-centered to connect different geopolitical currencies. Financial centers such as London, Singapore, and Tokyo may also become more important components of the RMB's diversified market in the future, taking on the roles of linking investment and trade needs of developed countries such as Europe, the United States, and Japan.
From the perspective of future development, it can be seen that Hong Kong still plays a vital role in regional economic development and can still serve as an entry point and bridge for foreign capital to enter China. The advantages of the legal, professional and financial services of Hong Kong's unique system will be conducive to the economic development of the Guangdong, Hong Kong, and Macau regions. In particular, Hong Kong's legal system, trade rules, and its linked exchange rate system are its competitive advantages as a free port of trade and capital under the system of "one country, two systems". For RMB internationalization, Hong Kong can still play a role in enhancing the competitiveness of the RMB and major international currencies with its institutional advantages. However, whether these functions can be extended in the future depends to a certain extent on the loosening and tightness of the scale of U.S. "suppression" against Hong Kong.
Final analysis conclusion:
The deepening of U.S. intervention in Hong Kong has brought about a new sore spot to U.S.-China frictions. From the view of Macro-Finance, this is a manifestation of the geo-politicization of currency competition which inadvertently has an impact on Hong Kong's status as an international financial center and an offshore RMB center. This will also inevitably affect the layout and progress of RMB's internationalization, as well as Hong Kong's role and function in the process.
