HK at the centre of yuan reform

The 550 billion yuan (HK$700 billion) stock connect scheme that links share trading between Hong Kong and Shanghai from today has already been hailed as just as important to our city as the H-shares listings of 20 years ago. But the scrapping, at the same time, of the 20,000 yuan daily currency conversion limit is even more significant to its future as an international finance centre. It may be true that a more liquid capital market and higher trading volumes will be good for the stock exchange and brokers. But with the decision to allow local residents to convert yuan freely, the real importance of the so-called through train is that it cements Hong Kong in the heart of China's currency reform process.

The key lies in the change in the settlement location for currency conversion, amid soaring demand for the yuan in Hong Kong ahead of today's launch. Instead of settling every trade as an onshore conversion with a cap of 20,000 yuan, Hong Kong residents are to be allowed to tap into the offshore yuan deposit pool of 1.1 trillion yuan, effectively shutting Shanghai banks out of the process.

Bypassing Shanghai may not have been a driving factor but the implications are far-reaching.

Hong Kong is sending a message that in terms of connecting international markets and investors with the mainland this is the place to get it done. Lifting the conversion cap in China would amount to a dismantling of capital and currency controls, which remains a long way off.

Our financial sector's flexibility and ability to think outside the box has come to the fore in reinforcing its edge when it comes to global connectivity. This has made it far easier for any investor anywhere to get hold of yuan-denominated securities.

Beijing has already been very successful in driving the yuan as a settlement currency of choice, making it the world's seventh most used currency for trade in goods. But capital controls mean it is not the investment unit of choice.