HKEx stresses the importance of a trading mechanism

Hong Kong Exchanges & Clearing Ltd (HKEx) said Tuesday it is working with banks for to establish a yuan liquidity pool sometime in the second half of this year.

The pool will facilitate listings as well as trading of yuan-denominated securities.

"Yuan-denominated securities could be listed and traded without a special yuan liquidity pool," said HKEx Chief Executive Charles Li. "However, it is important to establish a solid mechanism to facilitate the listings of yuan-denominated shares in Hong Kong, rather than having several listings of yuan-denominated products in which trading in the secondary market may be hindered by the limited yuan liquidity here."

HKEx is working with banks on foreign exchange and other treasury arrangements for a yuan liquidity pool. A timetable has not yet been determined but HKEx hopes a liquidity mechanism can be introduced in the second half of this year, the bourse operator said in a statement released Tuesday.

Previous reports said that Hong Kong business tycoon Li Ka-shing will launch the city's very first yuan-denominated IPO. The billionaire plans to raise up to 10 billion yuan from the new listing. However this initial attempt is not a typical stock IPO, but rather a Real Estate Investment Trust (REIT) consisting of commercial properties on the mainland owned by Cheung Kong and Hutchison Whampoa.

REITs invest in shopping malls, office buildings, apartments, warehouses and hotels, with revenues mainly coming from the properties' rents. As an investment vehicle, REITs offer investors a liquid and dividend-paying means of participating in the real estate market.

REITs, sharing more features with fixed-income type of products, require less liquidity, while pure equity products are more sensitive to the hurdles of liquidity, according to Li.

"I personally believe there will be a yuan (stock) IPO or equity product on the exchange this year," Li said. "But whether or not we will be able to develop a system that allows us to address this liquidity issue and create the possibility of a sustainable model this year, I don't know."

At the end of November 2010, yuan deposits in Hong Kong reached a total of 279.6 billion yuan, representing an increase of 62.5 billion yuan or up 29 percent from the end of October. Year-on-year figures showed an increase of 216.9 billion or 246 percent from the end of 2009, according to statistics released by the Hong Kong Monetary Authority.

Jun Ma, Deutsche Bank's chief economist for Greater China, said at a seminar Tuesday that the pace of yuan internationalization will speed up further this year and the offshore yuan business in Hong Kong will see noticeable growth. He forecast that yuan deposits in Hong Kong could reach 2 trillion yuan in the next three or four years.

With the emergence of offshore yuan products such as IPOs or ETFs (exchange traded funds), the Chinese currency is likely to achieve free convertibility in five years, according to Ma.

Tapping opportunities from yuan internationalization is one of the major plans for HKEx in 2011. Among a raft of initiatives, HKEx also said in Tuesday's statement that it has been conducting a study and soft consultation with market participants on the trading of futures and options after their current market close. Initial feedback has been encouraging, it said.

After-hours futures and options trading would help improve execution efficiency and trading arrangements, which is one of HKEx's key initiatives in its Strategic Plan 2010-2012. HKEx will seek market views on the proposal in the middle of this year, the bourse operator said.

China Daily

(HK Edition 01/12/2011 page2)