Hong Kong boosts yuan hub status by expanding mainland China bond collateral initiative

Hong Kong will expand the use of mainland Chinese bonds as collateral to obtain yuan liquidity, furthering efforts to enhance the currency's internationalisation and the city's role as an offshore yuan hub.
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CMU OmniClear, a wholly owned subsidiary of the Exchange Fund managed by the Hong Kong Monetary Authority, and Hong Kong Exchanges and Clearing (HKEX) signed a memorandum of understanding (MOU) on Tuesday that would allow the two entities to enhance cooperation in many areas.
The MOU would lead to the realisation of 'cross-asset class efficiencies across equities and fixed income, expanding the use of mainland bonds as collateral [and] enhancing Hong Kong's [role] as a bond issuance centre and [for] developing an international central securities depository in Asia', according to a statement from the HKMA.
Hong Kong is stepping up efforts to improve the post-trade securities infrastructure of its capital markets and support the long-term development of the city's fixed-income and currency ecosystem.
HKMA chief executive Eddie Yue said the MOU will support the development of Hong Kong's capital markets. Photo: Edmond So
'This MOU signifies an important milestone and our shared commitment to supporting the development of Hong Kong's capital markets,' said Eddie Yue, chief executive of the HKMA.
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Analyzing American economic policy isn't that interesting these days, except perhaps as a grim spectacle. So I've been thinking a little about Chinese economic policy. China's leaders leave much to be desired, but to their credit, they still think economic policy is about strengthening their nation, enriching their people and improving their technology instead of pursuing domestic culture wars by other means. Anyway, China has a lot of policy initiatives right now — cleaning up the fallout from the real estate bust, retaliating against America's tariffs, improving their health care system, and so on. But their most important policy — and the one everyone talks about here in the US — is their big industrial policy push. If you want to understand Chinese industrial policy, I recommend starting with Barry Naughton's free book, 'The Rise of China's Industrial Policy: 1978 to 2020.' The basic story is that until the mid-to-late 2000s, China didn't have a national industrial policy as such. It had a bunch of local governments trying to build up specific industries, usually by attracting investment from multinational companies. And it had a central government that tried to make it easy for local governments to do that, using macro policies like making sure coal was cheap, holding down the value of the Chinese currency in order to stimulate exports and so on. But it was not until the end of Hu Jintao's term in office — and really, not until Xi Jinping came to power — that China developed a national industrial policy, in which the government tries to promote specific industries using tools like subsidies and cheap bank loans. If you want a good primer on just how big those loans and subsidies are, and which industries they're going to, I recommend CSIS' 2022 report, 'Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective.' It's a lot. Here are the authors' estimates from 2019: Source: CSIS In some respects, this policy was successful. 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In 2023, you saw charts like this: Source: Shanghai Macro via Bert Hofman Along with this industrial policy, you saw a massive surge of Chinese-manufactured exports flowing out to the rest of the world. The most recent export surge has been labeled the 'Second China Shock', but in fact, the trend was already headed in that direction well before the pandemic: Source: CSIS China's competitive success in manufacturing industry after industry has been nothing short of spectacular. In just a couple of years, China went from a footnote in the global car industry to the world's leading auto exporter: Source: Visual Capitalist Obviously, this export surge is the most important way that people in countries like the US experience the results of China's industrial policy. So most commentary on the policy has focused on exports, trade balances and so on. But it's important to remember that most of what China is producing in this epic manufacturing surge is not being exported. 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'During the process, some companies will die of liquidity crises.'… BYD recently came under pressure to defend its financial numbers and business practices after Wei Jianjun, chair of rival Great Wall Motor, called for a comprehensive audit of all major domestic carmakers…'An Evergrande exists in [China's] auto sector at the moment — it just hasn't blown up,' he told local media, raising the spectre of the industry following the property sector into a spiralling debt crisis. How can these mighty world-conquering automakers be skating on the edge of bankruptcy when the government is pouring so many subsidies and cheap loans into the auto industry? The answer is simple: China's government is paying its car companies to compete each other to death. The Chinese government pays a ton of different car companies to make more cars. Chinese banks, at the government's behest, give cheap loans to a bunch of different car companies to make more cars. 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a day ago

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