A mainland visitor leaves a local bank that offers renminbi services in Hong Kong. AFP

HONG KONG: Yuan trading settlements will enable Hong Kong's enterprises to cut foreign exchange risks, and bring broader diversity to the local banking sector, Chief Executive Donald Tsang said yesterday.

"Enterprises in Hong Kong will soon be able to settle trades in renminbi through the banks with the mainland companies in the pilot scheme. The scheme will cover import, export as well as re-export," Tsang told reporters in a press briefing.

Shanghai and four cities in Guangdong province - Guangzhou, Shenzhen, Dongguan and Zhuhai - have been designated as the pilot cities to use renminbi in overseas trade settlements, as announced by the State Council Wednesday.

Tsang said the decision is a "breakthrough". He takes the view that local banks will be able to broaden services extensively through renminbi services offered to individual clients and enterprises. That will start momentum for yuan businesses in Hong Kong, he predicted.

"The scheme will enhance the diversity of renminbi assets in the Hong Kong banking system, increase the local capital liquidity of the renminbi, and bolster the renminbi clearing platform in Hong Kong," he said.

Tsang, however, pointed out that the scheme will not affect the linked exchange rate of the Hong Kong dollar to the US currency.

Secretary for Financial Services and the Treasury KC Chan said enterprises focusing on exports on a large scale likely will be invited to participate in the pilot program. "Trading between Hong Kong and the mainland amounted to HK$1.37 trillion last year," Chan said, "Allowing Hong Kong as the first city outside the mainland to do yuan trading settlement will further develop the cross-border trading."

Both Tsang and Chan said the territory's banking system is ready to start the scheme, as soon as mainland authorities come up with the operational details.

Daniel Chan, a senior investment strategist at DBS Bank (Hong Kong), said it will also be important to increase the liquidity of renminbi in the territory before implementing the scheme.

"Hong Kong may need some time for arranging the settlement," Chan said, "Unlike the mainland, where yuan is already the sole currency for trading," Chan said.

He said renminbi accounts only for 12 percent of export and import trading in Hong Kong. Therefore, the liquidity and trading function of the yuan may need further enhancement, in order to prepare for the global economic recovery.

Standard Chartered Bank, meanwhile, said in its research note that the State Council's announcement is the first step toward making renminbi an alternative to the US dollar as the prime trade currency in Asia.

The bank said the still to-be-designated yuan clearing banks in Hong Kong "will likely be able to source the yuan from the mainland or elsewhere, and will therefore be the key yuan liquidity providers."

(HK Edition 04/10/2009 page16)