Convertible Yuan

Deal signed on yuan settlement

Chinese currency may be used for cross-border trade from next month

Maria Chan, Neil Gough and Enoch Yiu
Jun 30, 2009

Trade between Hong Kong and the mainland could be settled in yuan from as early as next month after the two sides yesterday signed an agreement expected to help further internationalise the Chinese currency.

The memorandum of understanding between People’s Bank of China governor Zhou Xiaochuan and Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong will allow companies on both sides of the border to settle trade in yuan as well as other currencies.

That move will boost Hong Kong’s ambitions to become a yuan offshore centre and reflects Beijing’s ultimate desire to make the currency freely convertible.

Bilateral trade between Hong Kong and the mainland totalled an estimated US$203 billion last year.

Chief Executive Donald Tsang Yam-kuen said the agreement was a milestone in the city’s role as an international financial centre.

Financial Secretary John Tsang Chun-wah said the scheme would provide Hong Kong enterprises with more flexibility in their operations.

Mr Zhou said it was more important for countries in the Asia region to have closer co-operation since the global financial turmoil began.

“Enhancing co-operation in trade and finance between the mainland and Hong Kong is a way to cope with the global financial crisis,” he said, adding that it could also help firms reduce exchange risks and lower costs.

Mr Yam said he hoped yuan settlement could begin in July. Banks in Hong Kong could also provide trade finance, a form of lending, to customers under the scheme.

Hong Kong yuan deposits stood at 53 billion (HK$60.2 billion) at the end of May.

Hong Kong banks have been allowed to offer yuan deposit, remittance, exchange and credit card services since 2004 but have not been allowed to provide yuan lending.

The PBOC and HKMA in January agreed on a 200 billion yuan currency swap agreement to bolster short-term local liquidity of the yuan.

The State Council said early in April that it would allow traders in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan to settle their cross-border business in yuan.

In December, the council said Hong Kong and Macau would be permitted to use yuan for the settlement of trade with designated partners in Guangdong and the Yangtze River Delta under a pilot scheme. Mr Zhou said how many mainland enterprises participated in the scheme would depend on the governments of the two delta regions but “there will be at least a few hundred”.

Mr Yam said all Hong Kong exporters and importers could settle trade with their designated mainland counterparts, but the scheme could only be implemented after the PBOC issued administrative guidelines.

He said companies from other countries could also use Hong Kong as a platform to settle their trade with their mainland trading partners.

Goldman Sachs said the move reflected the mainland’s efforts to further internationalise the yuan.

“Our long-standing view has been that the increase in yuan circulation would pave the way towards the ultimate endgame of” the Hong Kong dollar being linked with the yuan, the brokerage said in a report.

Mr Zhou stopped in Hong Kong on his way to Beijing after a forum in Switzerland where he also held talks with his Brazilian counterpart that could pave the way for the two sides to recognise each other’s currency.