Two dozen major Hong Kong and Chinese companies, including Tencent, Alibaba, Meituan and AIA Group, can now be traded in both the Hong Kong dollar (the city’s local currency) and the yuan. Shares denominated in one currency can be freely interchanged with shares denominated in the other. In total, the firms taking part in the “HKD-RMB Dual Counter Model” are worth about $1.5 trillion in value, or over a third of the entire Hong Kong stock market.

Hong Kong Exchanges and Clearing (HKEx), which runs the city’s stock market, hopes an influx of yuan-denominated trading will bolster the city’s sluggish trading volumes. (While the scheme is currently only available to local and international investors, HKEX hopes to expand the scheme to mainland China later this year.)

In a Monday interview with CNBC, Nicolas Aguzin, CEO of HKEx, suggested that the ability to “transact in an instant basis in renminbi” would be a “huge difference” for mainland retail investors.

(Hong Kong, unlike China, has an open financial market with a freely-convertible local currency.)

Yet Aguzin shared another benefit to HKEx’s new program: That it would “continue helping on the internationalization of the renminbi.”

Hong Kong’s Hang Seng Index fell just over 0.6% on Monday. The index has fallen 1.2% so far this year, after a brief rally following China’s reopening fizzled out as the country’s recovery lost steam.

The global yuan

China has tried to encourage more global use of the renminbi as an alternative to the U.S. dollar for over a decade. 

Yet Russia’s invasion of Ukraine has boosted the yuan’s international status. U.S. sanctions on Russia–including freezing the country’s reserves of U.S. dollars–have forced Moscow to turn to other currencies to conduct international trade. 

The yuan surpassed the U.S. dollar as Russia’s most traded foreign currency earlier this year, according to Bloomberg, as more Russian companies bought and sold goods in the Chinese market. Even other countries, like Bangladesh and Pakistan, are turning to the yuan to do business with Russia. (Hong Kong hopes that some of these countries might now invest their holdings of Chinese currency in the city’s new yuan-denominated shares.

The share of trade conducted in China’s currency rose to 4.5% in February, compared to less than 2% a year earlier. That’s close to the share of trade conducted in the euro.

Recent problems in the U.S.—such as the tense debate over raising the U.S.’s borrowing limit, which risked the country’s first-ever default—may also be sullying the safe reputation of the U.S. dollar. 

“The U.S. banking industry’s turmoil, government debt problems, and huge deficits being monetised have damaged international confidence in the US dollar,” wrote Paul Chan, Hong Kong’s financial secretary, in a blog post last week tied to the launch of the “HKD-RMB Dual Counter Model.”

(Hong Kong’s local currency is pegged to the U.S. dollar. Chan has firmly dismissed calls to unpeg the two currencies in the past.)

Central banks are also considering the yuan to diversify their reserves. Eighty-five percent of central bank managers either invested in or were interested in investing in the Chinese currency last year, according to a survey from UBS.

Still, the yuan has a long way to go until it erodes the dominance of the U.S. dollar. Beijing maintains strict limits on cross-border transactions and foreign exchange. 

At the end of 2022, 54% of foreign exchange reserves were held in U.S. dollars—a proportion largely unchanged from the end of 2021, according to data from the International Monetary Fund.