MNI INTERVIEW2: HK Bond Market Should Be Open To China Buyers

Mainland Chinese should be allowed to invest in yuan-denominated bonds issued in Hong Kong, a move which would provide overseas demand with sufficient yuan to promote its global use, a designer of China’s roadmap for yuan internationalisation told MNI.

A global currency must have a stable mechanism for generating deficits in order to make it available for international use, but China would not be able to follow the example of the U.S. and allow a consistent and large trade deficit as this would have too damaging an effect on employment in the country’s manufacturing sector, said Cao Yuanzheng, a former chief economist at the state-owned Bank of China.

This means that an internationalised yuan will require China to operate a deficit in its capital account, Cao said, pointing to Hong Kong’s offshore bond market as a natural conduit. Allowing Chinese residents to buy these securities would also offer new investment opportunities for households, he added, while yuan-denominated bonds could also finance big infrastructure projects, such as the Pan-Asia Railway, including Vietnam's North-South Railway, as well as demand from countries which need China’s technology and new energy products. (See MNI INTERVIEW: HK Offshore RMB Bond Market To Expand)

Hong Kong’s economic status has already received a boost from disruption at other major ports due to the conflict in the Middle East, with some Gulf capital already seeking refuge in the Chinese territory, he added.

Since Asia consumes about 80% of the crude oil and 83% of the liquefied natural gas which passes through the Strait of Hormuz, the Iran war will also prompt Asian countries to accelerate their energy transition, further boosting trade with China and demand for the yuan, according to Cao. The development of new energy has shifted from being a “strategic choice” to a “strategic need” in the region, he said,  adding that countries facing energy shortages may seek closer energy links with China, perhaps even including Taiwan.

Yuan-denominated bonds issued in Hong Kong could finance purchases of Chinese green energy technologies and products, and could be repaid with proceeds from exports to China, he said. This cycle would boost demand for yuan more effectively than simply encouraging the currency’s use in cross-border trade settlement and would function despite China’s continuing capital controls, he said. (See MNI INTERVIEW: China 2026 Export Growth To Support Yuan)