Yuan investments plan promises rewards, risks
Beijing's decision to allow mainlanders to make direct investments in yuan in Hong Kong looks set to boost property sales and corporate acquisitions, but it risks fuelling asset bubbles, according to market watchers.
Investments were likely to pour into luxury homes, commercial properties, financial products and corporate takeovers under a plan to allow mainland investors to use the currency to invest here, said experts.
Few details of the plan were released, but it is one of several proposals Premier Wen Jiabao raised during Chief Executive Donald Tsang Yam-kuen's visit to Beijing on Monday and will help lay the foundation to make the yuan an international currency.
'Hong Kong is a major window to test the waters,' said Tao Dong, Credit Suisse's chief regional economist excluding Japan. 'It helps the city's financial development and boosts its position as an offshore yuan settlement centre.'
Yuan-denominated direct investments in Hong Kong is yet another step in the central government's effort to make the yuan a freely convertible currency.
In July, the city was allowed to settle cross-border trade in yuan, a move that led to 490 million yuan (HK$555.6 million) in transactions by the end of last month. There are also 57 billion yuan in deposits in Hong Kong.
'The plan will create a pool of yuan in the form of investments in the city,' said Priscilla Lau Pui-king, an associate professor and associate head of the department of business studies at the Hong Kong Polytechnic University.
'It could funnel tens of billions of yuan of investments into Hong Kong through the mainland's sovereign fund (China Investment Corp).'
Describing the plan for allowing direct investments of yuan as the equivalent of 'the mainland's solo traveller scheme', Federation of Hong Kong Industries deputy chairman Stanley Lau Chin-ho expects the city's retail sales and corporate mergers and acquisitions to thrive.
Midland Realty chief analyst Buggle Lau Ka-fai anticipates investments could flow into luxury and commercial properties, but he is sceptical about whether the central government will allow a large amount of funds to flood into the city during the trial stage.
Tao said the Hong Kong government would have to put in place policies to handle excess liquidity, fearing that extra funds could fuel an asset bubble.
'It is a dilemma for the government,' Tao said, commenting on how Hong Kong would manage additional funds on top of the HK$640 billion in hot money that has flowed into the city since October last year. 'The plan comes with a cost.'
