July 11, 2013 / 5:21 AM / 5 years ago

CNH Tracker-Challenges rise on mainland to Hong Kong's yuan role

By Saikat Chatterjee
    HONG KONG, July 11 (Reuters) - As Hong Kong seeks to extend
its dominance as a hub for offshore yuan transactions, China is
opening trade and finance centres at home that could eventually
challenge the former British colony's role.
    With total yuan assets, comprising bank deposits and bonds,
standing at more than a trillion yuan, and trade in yuan
growing, Hong Kong can breathe easy for some time to come, but
China clearly has ambitions for centres on the mainland as it
seeks to accelerate internationalisation of the yuan.
    The State Council has granted approval to Shanghai to
establish a pilot free trade zone and media reports have said
that Beijing has given the nod to foreign banks to set up
subsidiaries there. 
    And about an hour's drive away from Hong Kong, China is
establishing a new economic zone, earmarked to become a testing
ground for full capital account convertibility.
    Focused on finance, logistics and IT services, the Qianhai
Bay economic zone hopes to draw on neighbouring Hong Kong's
expertise as a hub for the renminbi, or offhsore yuan, as it
seeks to provide the same services in renminbi bond and equity
offerings, insurance products and trade settlement.
    "Hong Kong can be a good mentor to Qianhai for renminbi
services," Zhang Bei, director general of the new economic zone,
told a conference on Wednesday.
    The zone is being built, at planned cost of 400 billion
yuan, on 30 square kilometres of reclaimed land in the Shenzhen
province. It will offer low taxes, and seek to match Hong Kong's
rigorous legal regime and anticorruption vigilance.
    Four hundred financial institutions have applied to set up
operations in Qianhai, accounting for two-thirds of the total
that have applied, according to Shenzhen government officials.
    Expected to be fully up and running over the next three
years, Qianhai is already building up business.
    The first batch of loan agreements signed in January 
between 15 Qianhai companies and 15 Hong Kong banks totalled
around 2 billion yuan, but analysts say the total had risen to
about 5 billion yuan by May.
    In comparison, HSBC estimates the total amount of yuan loans
outstanding in Hong Kong at around 90 billion yuan. 
    China's central bank has updated rules on cross-border yuan
transactions for onshore banks and companies by enabling them to
provide settlement services for qualified companies and
extending the tenors of yuan credit lines provided by domestic
banks to overseas financial institutions.
    June was a forgettable month for offshore yuan-denominated
bonds or the dim sum bond market. It lost 2.4 percent in U.S.
dollar terms and 2.5 percent in local terms according to HSBC's
local bond indexes, making it the worst month for the bond
market since September 2011.
    France plans to set up a currency swap line with China. So
far, about 21 countries have signed currency swap lines with the
People's Bank of China in order to strengthen trade ties. The
latest one was a 200 billion yuan swap line signed between
Britain and China in June.    
    Yuan deposits in Hong Kong:By the end of May, yuan deposits in Hong Kong swelled to a
record 700 billion yuan, making up more than 10 percent of the
total deposit base among Hong Kong banks, despite expectations
that the yuan will weaken later this year. Heavier trade
settlement was the key reason behind the surge in volumes.
China updates rules on cross-border yuan transactions
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