Hong Kong targets creation of rival to Euroclear | USAEMALL.com

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Hong Kong authorities are pushing to create an Asian rival to Europe’s influential securities depositories, in a bid to lessen dependence on western financial infrastructure and boost global use of the renminbi.

Hong Kong Exchanges and Clearing, which runs the stock market, said on Tuesday it was working with the territory’s monetary authority to develop an Asian international settlement house that could rival Belgium’s Euroclear and Clearstream of Luxembourg.

China has sought to reduce its dependency on western financial systems amid growing geopolitical tensions and comes as Europe moves to seize €200bn of frozen Russian assets, to strengthen its hand in negotiations over a ceasefire in Ukraine.

Settlement houses play a critical role in financial markets, safeguarding assets, maintaining records and transferring assets from seller to buyer.

HKEX and the Hong Kong Monetary Authority said the venture would provide a platform for Beijing’s ambition to “internationalise” the renminbi, by deepening the use of the currency as a global reserve asset and for settling trades.

It would “advance the development of Hong Kong’s fixed-income market, enabling the next chapter of renminbi internationalisation and enhancing Hong Kong’s status as an international financial centre”, said Bonnie Chan, chief executive of HKEX.

The memorandum of understanding plans to turn the HKMA’s Central Moneymarkets Unit, which settles debt, into an international securities house that can handle cross border payments and multiple currencies.

Foreign investors would be able to manage renminbi-denominated bond liquidity and hold global assets under Hong Kong’s jurisdiction.

The HKMA has been exploring the creation of a competitor to the European duo since at least June 2022. China is the world’s second-largest fixed-income market at about $25tn while CMU holds $5tn in assets under custody. By contrast, Euroclear, the market leader, holds around $42tn while $20tn sits at Clearstream.

The Financial Times reported last month that China’s holdings of US Treasury bonds had fallen to levels last seen in 2009, as the world’s second-largest economy looked to reduce its exposure to US sovereign debt and also increasingly disguise its holdings by shifting to using custodial accounts such as Euroclear in order to reduce scrutiny.

Hong Kong has positioned itself as a hub for the offshore renminbi and the HKEX has expanded its infrastructure for traders to buy CNH futures, hedge and trade interest rate derivatives. 

In January the People’s Bank of China and the HKMA jointly announced the creation of an Rmb100bn ($13.8bn) renminbi trade financing facility, the expansion of the bond connect programme and growing the use of renminbi-denominated debt as collateral as part of efforts to “consolidate Hong Kong’s status as the global offshore renminbi business hub”.

“We believe there is still significant potential for future growth in global demand for mainland bonds,” said Eddie Yue, chief executive of the HKMA, noting the “relatively limited scope for global investors to use their mainland bond holdings as collateral in the international markets”.