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Hong Kong Stocks Eye the Yuan: A Power Play for China’s Currency on the Global Stage

In an intriguing development on the international finance scene, 24 stocks listed on the Hong Kong Stock Exchange are set to be priced in the yuan, effectively amplifying the influence of China’s currency in global financial transactions. This list includes behemoths like Alibaba and Tencent, with shares now open to be traded in both yuan and the Hong Kong dollar, the latter being pegged to the US dollar.

This is part of an initiative called the Dual Counter Model program, where the Hong Kong Stock Exchanges and Clearing (HKEX) aims to attract international investors who hold yuan. The overarching goal? To eventually bring mainland Chinese investors into the fold. The potential pool of investors is significant, particularly in countries like Russia, which has increasingly leaned on China’s currency due to the influence of Western sanctions.

In an attempt to regulate potential disparities, HKEX will roll out a market-maker program designed to bridge the price gap between the two currencies. This initiative brings a critical choice to the table for investors: trade with Hong Kong dollars or the yuan. The latter option can be enticing for those looking to curtail conversion and hedging costs, especially given the yuan’s recent volatility.

Indeed, the yuan currently stands at its lowest against the US dollar since November, owing in part to a less-than-expected post-COVID economic recovery. Further, according to the real effective exchange rate against another currency basket from the Bank of International Settlements, the yuan is at its lowest since 2014.

The new trading program in Hong Kong is part of China’s broader strategy to extend the reach of the yuan and put a dent in the US dollar’s global supremacy. A prime example of this strategy was witnessed earlier this year when China and Brazil agreed to conduct trade using their respective currencies, sidestepping the US dollar – traditionally the primary currency in international trade, especially commodities.

In a similar move, Argentina announced that it will pay for imports from China in yuan, not the US dollar. Furthermore, Beijing has been lobbying Middle Eastern countries to price oil in yuan rather than dollars.

In a nutshell, these developments represent a subtle yet potent power play by China, signifying its intent to leverage the yuan’s potential as a key player in global finance. For investors and entrepreneurs alike, the implications could be enormous, as the changing landscape of international finance could open new avenues and bring about fresh challenges.