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Explainer: Macau's currency, fixed exchange rate and banking system

Enoch Yiuenoch.yiu@scmp.com

Hong Kong or mainland tourists seldom need to head to money changers when they visit Macau, as the Hong Kong dollar and the yuan are widely accepted by casinos, retailers and taxi drivers in the former Portuguese colony. As China marks the 20th anniversary of the return of Macau to its sovereignty, the challenge lies in elevating the local currency, known as the Macanese pataca, in international investment and trade, as the city outgrows its status as Asia's top gambling hub.

Presaging President Xi Jinping's visit last week, China increased the yuan remittance threshold in a move seen as empowering the economy of the city located just west of Hong Kong. Among others, the world's second wealthiest place on earth, on GDP per capita basis, could possibly get a stock exchange of its own for investors to place their bets away from casinos, some analysts speculated. "If Macau wants to be an international financial centre, it needs to handle its currency policy as the pataca is not used anywhere outside the city," said Clement Chan Kam-wing, managing director of accounting firm BDO. "Will the future stock exchange trade in pataca or yuan, and how can investors get the currencies to trade local stocks?" These are some of the questions to consider, he added.

The Macanese pataca is identified by the MOP code assigned by the International Organization for Standardization.

The Monetary Authority of Macao (MAM) is the de facto central bank of the special administrative region, responsible for regulating the banking industry. There are 30 licensed financial institutions serving a city population of 672,000, dominated by China's biggest lenders.

Only two commercial banks, namely Banco Nacional Ultramarino and Bank of China (Macau) are authorised to issue local bank notes.

The notes come in MOP$10 (pronounced as 10 patacas), MOP$20, MOP$50, MOP$100, MOP$500 and MOP$1,000 denominations, and are printed in both Chinese and Portuguese languages. The government mints coins in 10 avos (0.01 pataca), 20 avos, and 50 avos, as well as MOP$1, MOP$2, MOP$5 and MOP$10.

The Macanese pataca is pegged to the Hong Kong dollar at HK$1 to MOP$1.03 since 1983 through a currency board called the Linked Exchange Rate System. Under the system, whenever the two note-issuing banks print or redeem bank notes, they also make corresponding payments in Hong Kong dollar to the Monetary Authority of Macao.

Since the Hong Kong dollar is also pegged with the US dollar since 1983 at HK$7.80, the exchange rate between the pataca and the US dollar has also been anchored at around MOP$8.

The monetary authority adopts a policy like its counterpart in Hong Kong, which typically follows the US Federal Reserve policy rate decision in lockstep. Macau's current base rate is about 2 per cent, the same as in Hong Kong, while commercial banks' prime lending rate is also around 5.375 per cent.

Among the city's 30 financial institutions, 12 are locally-incorporated lenders while 18 are local units of foreign banks, mostly owned or controlled by mainland Chinese and Hong Kong banking groups. Most of them offer retail and commercial banking services. No big investment banks have set up shop locally so far.

The Bank of China (Macau Branch) is the largest in the city, with a total assets of MOP$680 billion at the end of 2018. It had a 40 per cent share of the loans and deposits in the city.

Currency deposits in local banks are dominated by the Hong Kong dollar, with 49.4 per cent share of the total of MOP$1.146 trillion on October 31, according to the monetary authority. The US dollar made up 25 per cent, while the Macanese pataca accounted for 19.1 per cent and the yuan 3.9 per cent.

 Total offshore yuan deposits in Macau's banking system stood at 39.48 billion yuan, or 45.25 billion pataca, on October 31. As a comparison, that equals to only 6.2 per cent of such deposits in Hong Kong.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.