Macao yuan exchange development right path to serve itself and nation’s overall strategy

By Wu Jinduo Source:Global Times Published: 2019/10/15 19:53:40

Illustration: Luo Xuan/GT

The proposed Macao stock exchange has attracted worldwide attention. It should be guided by the basic principle of "take full advantage of Macao and serve China's overall strategy," a vital component of the Greater Bay Area (GBA) and the country's multi-level capital market. 

If Macao establishes an offshore yuan NASDAQ, and it is complementary to the Hong Kong Stock Exchange (HKSE) and mutually beneficial to the mainland, it would be strategically significant for the development of the GBA and the Hainan Free Trade Zone.

The GBA region is an incubation base for innovation and advanced technology. According to official data from the Guangdong provincial monetary authority, the province is home to 45,000 state-level high-tech enterprises, but only 600 firms went public. Of those listed companies, not all are high-tech enterprises. The Shenzhen Stock Exchange and the Shanghai Stock Exchange are far from meeting the financing demands for high-tech enterprises, while the HKSE has a higher listing threshold. 

On the other hand, since the establishment of its capital market, China's financing system relies on banks. Developing direct financing and a multi-level capital market is a goal of the country's capital market reform. In addition, small and medium-sized enterprise (SME) financing is a global concern. 

Based on the success of other countries, direct financing through capital markets has proven to be more effective. One typical success is the US' NASDAQ, which matches high-risk-preferred funds with corresponding risk-level assets in the financial market. An offshore-yuan-denominated NASDAQ complements the mainland's stock market for SMEs such as Growth Enterprise Market and provides a financing channel for Chinese innovation.

There are several mature financial centers in the GBA region. Since there isn't an offshore financial market for the yuan, which is aimed at SMEs and direct financing, an offshore yuan NASDAQ exchange would fill this gap.

What are the advantages of Macao creating a NASDAQ-like exchange? First, Hong Kong and Macao are the only financial hubs with an offshore yuan pricing mechanism that use sovereign bonds. Other offshore centers can only use currency swaps for indirect pricing. 

Second, Macao is a free port without foreign-exchange control, so currencies can enter and exit freely. Third, Macao is the world's top offshore yuan deposit center. According to Global Capital, Macao's offshore yuan deposits ranked sixth globally in 2018. In addition, Macao has explored ways to build offshore yuan direct financing through multiple channels, paving the way for offshore yuan asset pricing. 

Last December, China (Macao) Financial Asset Exchange, a financial asset trading center with bond issuance and trading as its main business, was established. It not only provided direct financing (bond) channels for fresh Macao enterprises, but also a pricing mechanism for Macao offshore yuan. Finally, the Chinese government issues offshore-yuan-denominated bonds in Macao to provide pricing anchors for the offshore yuan in the region. As bond issuances mature, the pricing mechanism for offshore yuan in Macao will gradually improve.

A Macao exchange may potentially compete with the HKSE, Shenzhen Stock Exchange and Shanghai Stock Exchange. At present, it is difficult for it to challenge the HKSE in terms of financial marketization and industrial diversification. Therefore, by improving financial infrastructure, consolidating the real economy, taking precautions against risks and strengthening supervision in advance, Macao can become an attractive global exchange. 

Macao should explore ways to distinguish itself from traditional financial services, and explore the establishment of a green and financial platform between China and Portugal. Macao should also support Guangdong and Hong Kong. Macao insurance institutions could also participate in the development of innovative cross-border insurance products and provide customers with services such as facilitating insurance, investigations and claims settlements. 

Macao can promote the interconnection of financial markets, expanding the scale and scope of cross-border yuan usage. It should conduct cross-border yuan lending, cross-agency sales of yuan-related financial products, enlarge the space for cross-border investment between Macao and mainland residents and institutions, and expand channels for residents to invest in each other's financial products. 

On the premise of compliance with the law and regulations, Macao should promote the cross-border transactions of funds, insurance and other financial products in the region, enrich the categories and channels of investment products, and establish a mechanism for the exchange of funds and products. It needs to support its institutional investors in raising yuan-denominated funds to invest in their capital market and participate in domestic private equity investment and venture capital funds, as well as more offshore-yuan commodities and other risk management tools. Mainland and Macao insurance institutions should be encouraged to carry out cross-border yuan reinsurance business which would improve the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and bond connect.

The author is head of fixed income at the research institute of Great Wall Securities and a part-time fellow of the Development Research Institute at Fudan University.


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