Hong Kong Monetary Authority Chief Executive Norman Chan (right) and People's Bank of China Deputy Governor Hu Xiaolian shake hands after signing a supplementary memorandum of cooperation on renminbi business in Hong Kong Monday. Edmond Tang / China Daily

No more limits on yuan purchase of wealth management products by locals

The People's Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA) signed supplementary and revised agreements on renminbi (RMB) businesses in the city Monday, further boosting the city's status as an offshore RMB financial hub.

HKMA chief executive Norman Chan and visiting PBoC deputy governor Hu Xiaolian signed the agreements in Hong Kong.

The PBoC and the HKMA agreed that the city will have no restrictions on yuan deposit holders transferring cash to buy wealth-management products, HKMA's Chief Executive Norman Chan said after the signing ceremony. Hu said she hoped yuan business in the city will further develop under the pacts, which cover a range of payments.

The two sides agreed "to further promote Hong Kong's status and role as an RMB market platform in the process of developing RMB business outside the mainland," the HKMA said in a statement.

"The revision of the Clearing Agreement will lead to the rise of many more types of RMB-denominated financial products and financial intermediary activities in the local financial market, helping the city's RMB business platform leap to new heights," Chan said after the signing ceremony, referring to the latest amendments to the clearing arrangements between the two sides on RMB funds in the city.

"As Hong Kong possesses the sophisticated clearing system and has extensive trading linkages with the world, I believe the revised Clearing Agreement can prompt local banking players take proactive positions in the RMB clearing business, which will further strengthen the position of Hong Kong as the leading financial and trading hub," Hu said.

The mainland authority engineered the RMB trade settlement pilot scheme in July 2009 and expanded the program in June 2010. Hu said RMB trade settlements have accumulated to 70.6 billion yuan since the inception of the pilot scheme, of which Hong Kong has contributed 75 percent.

As expected, the latest amendments haven't relaxed or removed the current cap on yuan conversion, under which local residents can buy only up to 20,000 yuan per day.

However, the amendments allow companies to buy or sell RMB in Hong Kong without limits and let insurance companies settle their RMB-denominated products in yuan rather than in Hong Kong dollars.

The amendments allow all authorized institutions to open and maintain RMB accounts at local banks to facilitate the transfer of RMB funds between banks, as well as the purchase or borrowing of RMB funds for non-trade settlement purposes.

"Local banks will exercise prudential risk management procedures to evaluate the financial strength of the corporate clients so that these corporations cannot purchase or borrow the yuan from local banks to an excessive level that will hurt bank stability," Chan said.

Chan expects that a flurry of RMB-denominated financial products will emerge after the signing of the revised Clearing Agreement, but added that the development pace will be gradual.

"I expect yuan-related derivative financial products, such as structured products will gradually come out in the market, but the problem is that as the yuan is still not a freely-convertible currency, it will hamper the potential returns of these yuan-related financial products because of the exchange rate risk," Chan said.

Chan added that the enhancement of the RMB financial intermediary activities will spur the demand for RMB financing activities that may lead to the rise of the RMB interest rate in the city.

Reuters contributed to this story.

China Daily

(HK Edition 07/20/2010 page3)