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.
Not just about currency appreciation anymore
Most Hongkongers have experienced the yuan story in terms of their investments. Initially, this was in the form of stockpiling vast amounts of yuan on deposit at banks at a low interest rate.
But Hong Kong's yuan market has evolved quickly in three years. The big breakthrough happened in July 2010, when the People's Bank of China and the Hong Kong Monetary Authority allowed institutional investors and corporations to open yuan accounts in the city.
This reform had the effect of letting corporations raise capital in yuan - they now have the ability to hold any funds raised in a Hong Kong account - and allowing investors to hold yuan to buy and sell securities. The most obvious and immediate impact of the new regime was a surge in issuance of dim sum bonds (offshore yuan bonds) in Hong Kong.
"Previous to 2010, only retail investors could buy yuan and there was not a diverse enough pool to support broad bond issuance," said Kuldeep Singh, Citi's head of markets and country treasurer. "Post the liberalisations in 2010, we found ourselves in a situation where institutions could accumulate yuan, and you had a case-by-case ability for issuers to issue bonds in Hong Kong and to repatriate proceeds into China. So there was a supply of yuan and a usefulness to yuan. That activated the dim sum market."
Dim sum bonds jump-started the yuan investment market in Hong Kong, and banks quickly rolled out an array of instruments to the public. For example, HSBC launched yuan life insurance, yuan structured deposits and internet banking in yuan in 2010.
The year 2011 was characterised by rapid yuan accumulation - deposits grew 87 per cent in Hong Kong - and a quintupling of dim sum bond issuance. Issuers also began to experiment with different yuan instruments, with Cheung Kong, for example, selling Hong Kong's first yuan-denominated initial public offering in Hui Xian Reit.
By last year, Hong Kong banks were getting more adept at lending in yuan, which increased their demand for deposits. Banks started to pay attractive rates for certificates of deposit, and the instrument took off. Hong Kong funds held in yuan certificates rose 60 per cent last year and, by July this year, such certificates made up about one-fifth of Hong Kong's yuan deposit base, the HKMA said.
Last year also saw the launch of the RQFII scheme in Hong Kong, which allowed offshore investors to use yuan to buy mainland securities. Hong Kong got 23 RQFII funds during the year, including its first exchange-traded funds that invest directly in A shares.
This brings us to 2013. Hong Kong is easily the world's biggest offshore yuan trading hub, and it quickly acquired all the accoutrements of a fully fledged currency market, including foreign-exchange futures, deliverable forwards, a yuan money market and an interbank lending regime in yuan that ticks along with daily liquidity of about US$3 billion.
In June, 16 banks launched CNH Hong Kong interbank offered rate fixing, establishing a rate at which they will lend yuan to each other. This will pave the way for a syndicated loan market in yuan and provides a benchmark on which to base interest rate derivatives (the "last leg" in the development of this market, says Candy Ho, HSBC's head of yuan business development).
Hong Kong's investors will see the changes in a refinement of existing instruments. For example, Hong Kong got its first floating-rate certificate of deposit in June, which was made possible by the creation of CNH Hibor.
It is notable that Hong Kong's market for yuan investments is thriving, despite the fact that yuan currency appreciation has gone off the boil.
"Expectations for yuan appreciation have quietened down in the past year, which signals that the yuan is at equilibrium," Ho said. "We expect 1 to 2 per cent appreciation in the coming two to three years."
Nevertheless, the dim sum market is having its best year so far in terms of issuance numbers, and it is only September.
Vicky Kong, Standard Chartered's Hong Kong head of wealth management, said Hong Kong sales of yuan structured deposits at her bank rose 50 per cent in the first eight months of this year.
The RQFII scheme is also expanding rapidly. People have a lot of choices these days and investing in yuan is no longer a straight bet on currency appreciation. It has become a more subtle decision about the instrument, issuer and returns.
In this way, Beijing has achieved its goal for the yuan in Hong Kong - it has become just like any other currency.