Bankers' support for scrapping of daily yuan conversion cap decisive

The Hong Kong Monetary Authority toyed with various options on the 20,000 yuan daily exchange cap while lobbying Beijing but finally decided to press for its elimination altogether in response to demands from bankers, the Post has learned.

The options weighed by the city's de facto central bank included doubling the cap or raising it to 100,000 yuan a day.

HKMA chief executive Norman Chan Tak-lam said: "We finally thought it would be best to remove the cap completely by changing the yuan settlement and using the offshore yuan market here instead of settling in the mainland."

A source told the Post that the HKMA was initially lobbying to get the cap raised but bankers preferred to have it removed, as that would make it easier for them to launch yuan investment products and offer yuan loans.

"Had the cap been raised to only 40,000 yuan, it would still have been a limit. It would also have meant Hong Kong needed to continue to lobby for raising the cap further in future. Investors would still have found it hard to get the yuan they needed for investment and the banks would have been reluctant to offer yuan investment products or individual yuan loans," the source said.

Under the Hong Kong settlement agreement signed in 2004 between the HKMA and the People's Bank of China, all yuan bought by Hong Kong residents is settled by banks in the onshore market in Shanghai. The source said that if that practice had continued, it would have been hard for the central government to implement a zero-cap policy, as that would have eased capital controls too much.