In addition, the People's Bank of China and the Hong Kong Monetary Authority are studying the possibility of allowing currency swaps, expanding the yuan business in the city and using the yuan for trade settlements with the mainland.

Without giving details, PBOC officials also said they were exploring the possibility of using the city as a centre of trade settlement between Taiwan and the mainland.

'[The PBOC and HKMA] are working very closely and conducting research on measures to resist the recent financial crisis,' said Luo Rui, the deputy director-general of the PBOC's General Office.

Mr Luo said the moves would help strengthen Hong Kong's position as an international financial hub.

Joseph Yam Chi-kwong, the chief executive of the HKMA, has called for fewer restrictions on yuan bond issues in the city, saying it would promote wider use of the currency in global markets.

'It's a good time to further internationalise [the yuan] business,' Mr Yam said this week in Beijing after meetings with mainland government officials.

Chan Kay-cheung, a vice-chairman of Bank of East Asia (China), said the bank was interested in issuing yuan-denominated bonds in Hong Kong, if permitted.

'It will be even better if banks are also allowed to issue yuan bonds on the mainland,' Mr Chan said. 'Issuing yuan bonds will enable banks to generate more stable yuan funding.'

Bank of China, China Construction Bank Corp and Bank of Communications have sold a combined 9 billion yuan (HK$10.22 billion) of bonds in Hong Kong so far this year, compared with 10 billion yuan last year.

'We are studying the promotion of yuan-denominated bond issuances in Hong Kong, using the yuan for trade settlement and expanding mainland residents' channels to invest directly overseas,' Mr Luo said.

Fan Laifa, the chief of the PBOC's International Department for Hong Kong, Macau and Taiwan, said the central bank and the HKMA were also studying the possibility of currency swaps between the two economies.

They are also discussing whether to use Hong Kong as a centre for trade settlements between the mainland and Taiwan.

Mr Luo said the PBOC's decision to slash interest rates on Tuesday, the biggest cut in 11 years, demonstrated the central government's determination to shield the economy from the global downturn.

However, he refused to commit to further rate cuts in the near future, saying only that the central bank needed time to observe the effects of the four rate cuts it had made in the past two months.

Mr Luo said the central bank would adhere to its current exchange policy, rejecting calls by some academics to devalue the yuan to help the declining export sector.

He also hinted that the central government would continue to buy United States government bonds, despite widespread calls to diversify from US dollar debt.

China is the biggest holder of US government bonds, with more than US$700 billion. This surpasses Japan's US$595 billion and accounts for 35.4 per cent of the holdings by foreign central banks.

On the domestic economy, Mr Luo said the central bank was working on measures to encourage commercial banks to increase lending to small and medium-sized enterprises that had been badly hit by the financial crisis and faced difficulty in securing bank financing.

Additional reporting by Maria Chan

Holding steady

Central bank needs time to see effects of four rate cuts on the economy

The amount of yuan bonds sold by CCB, BOC and Bocom in Hong Kong this year: yuan 9b