China took a big step toward internationalising its currency on Monday, tweaking rules to allow the sale of yuan-denominated financial products in Hong Kong and giving companies greater access to yuan funds.
The Hong Kong Monetary Authority (HKMA) said it had signed an amendment to its yuan clearing arrangements with the People's Bank of China (PBOC) that would allow companies to buy or sell yuan in Hong Kong without limits and let insurance companies settle their yuan-denominated products in yuan rather than Hong Kong dollars.
The changes are part of a gradual opening of China's capital account to the world and are expected greatly to increase the use of the yuan, also called renminbi, for investment purposes in Hong Kong. They complement measures to raise the profile of the yuan in capital markets and trade.
"The amendment of the renminbi clearing agreement is very important to the promotion of more renminbi investment products," said Liao Qun, chief economist and China strategist at CITIC Bank International. "With this revised agreement and broader cross-border yuan settlement, I estimate that renminbi deposits in Hong Kong will increase by 5 billion yuan ($738 million) each month in the second half of this year, making total deposits surpass 100 billion by end of 2010."
The revised rules regarding yuan clearing in Hong Kong were reported by local newspapers last week.
Yuan deposits in Hong Kong in May totalled about 84.7 billion yuan, up 4.7 percent from April. Yuan settlements in city rose to 7.9 billion yuan from a revised 6.7 billion yuan in May.
As the market develops, Chinese companies may also be allowed to list in Hong Kong by raising yuan directly, instead of the current practice of raising Hong Kong dollars, Liao added.
NEW HEIGHTS
Rather than just hold money in yuan deposits in Hong Kong and speculate on appreciation, Hong Kong banking and insurance firms can now sell sophisticated yuan-denominated structured products and other assets directly to their clients.
Companies and individual consumers can also transfer yuan between accounts, and brokers can trade yuan shares.
The amendments also solidify Hong Kong's role as a financial intermediary between China and the rest of the world, a coveted position at a time when Shanghai also is competing to be the gateway to the mainland.
"I expect that many more types of financial intermediary activities denominated in renminbi will be introduced in the market, helping Hong Kong's renminbi business platform leap to new heights," Norman Chan, chief executive of the HKMA, said in a statement.
Wasting no time, Standard Chartered Plc on Monday said it would offer yuan-denominated structured investments to its retail and wholesale clients.
China has used yuan trade settlement as a starting point to gradually internationalise the currency. Its central bank recently said it was extending the yuan trade settlement scheme to 20 provinces, autonomous regions and municipalities in China and all overseas nations and regions.
In the first six months of 2010, volume of trade settled in yuan was 70.6 billion yuan, three quarters of which were from Hong Kong, the HKMA said.
China's positive growth prospects support growing hunger among companies and investors for a piece of the Middle Kingdom. That hunger was only whetted further on June 19, when China de-pegged the yuan from the U.S. dollar and allowed more exchange rate flexibility.
The ultimate goal was to increase both the sources and uses of yuan funds in Hong Kong, said Frances Cheung, a debt strategist at Credit Agricole CIB.
"The issues remain as to how corporates who would like to buy goods using yuan can get the yuan, and what those who receive yuan via exports can do with the yuan they are holding. By allowing more yuan-denominated financial products, both problems can be solved," she said.
The new rules allow any business to receive a yuan loan, though stopped short of allowing individuals to borrow in yuan.
(Additional reporting by Alison Leung and Umesh Desai)
(Editing by Chris Lewis)
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