The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Yuan deposit growth to 'maintain last year's momentum', says BOCHK
Jeanny Yu and Kanis Li
Bank of China (Hong Kong) expects the city's yuan deposits to keep growing despite capital outflow risks, reaching 1.16 trillion yuan (HK$1.48 trillion) by the end of this year, driven by the prospect of steady appreciation in the currency and increasing overseas investments by mainlanders.
Yang Ruhai, the general manager and head of yuan business at BOCHK, the sole clearing bank for yuan business in Hong Kong, said he expected deposits of the currency in Hong Kong would grow by as much as 300 billion yuan this year, compared with 260 billion yuan last year.
"We see the growth maintaining last year's momentum, although we do not see any reason to support faster growth, thanks to the exit of quantitative easing in the US," Yang said yesterday.
He said he expected the yuan to appreciate by between 1.5 per cent and 2 per cent against the US dollar this year, down from last year's 3 per cent increase.
Another factor offsetting the negative impact of US tapering would be the rapid growth in yuan outward direct investment, which is expected to see more mainland firms shift their onshore yuan capital to Hong Kong, which has been serving as the platform for mainland enterprises to go abroad, Yang said.
Beijing launched a pilot outward direct investment scheme in January 2011, allowing mainland firms to conduct direct investments overseas using yuan.
The volume totalled 80 billion yuan last year, compared with 30 billion yuan in 2012, Yang said.
As the US Federal Reserve reins in its quantitative easing programme, capital that was invested in developing economies where rates were higher is starting to flow back to developed markets as interest rates begin to rise there.
Yet compared with other emerging market currencies - which have been taking a heavy beating from the strengthening of the US dollar - the yuan could be a bright spot in the emerging currency basket this year, Yang said.
"Even if the US tapering triggers capital outflow and the US dollar strengthens, the yuan will still be steadily on an appreciation track," he said.