The yuan will become one of the top three currencies used in global trade within five years, accelerating Hong Kong's development as an offshore yuan centre, HSBC economists say.
'Within the next five years, one third of China's cross-border trade will likely be settled in renminbi rather than dollars,' said Qu Hongbin, HSBC's chief economist for greater China. 'By then each year there will be nearly US$2 trillion worth trade of growth settled in renminbi.'
While some analysts said that estimate was overly optimistic, they agreed with Qu's view that regulation changes on direct investment overseas this week were an important step taken by China to open up its capital account.
On Thursday China's central bank announced a pilot scheme to allow Chinese enterprises, upon approval by mainland authorities, to use the yuan in direct investment overseas. It could be used to establish new companies, for mergers and acquisitions and to acquire equity.
Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, said the new policy would enhance circulation of yuan funds, and boost Hong Kong's development as an offshore yuan market.
Under the new policy, mainland enterprises could conduct investments through Hong Kong's offshore yuan centre, and, at the same time, make use of the multi-currency and multi-functional financial platform in Hong Kong, said Chan.
The new movement meant the yuan would have both trade and investment channels to go abroad.
Analysts expected the amount of yuan held by foreign companies outside China to surge, prompting the question of where offshore yuan holders would park the money.
'The solution is here in Hong Kong,' said Lu Zhengwei, senior economist at the Industrial Bank of China.
'This is why the government is encouraging Hong Kong to develop offshore renminbi products.'
Hong Kong has long been a platform for mainland outward direct investments and yuan investment product development. In 2009, these investments amounted to US$56.5 billion, of which 63 per cent was invested in or through Hong Kong, according to the HKMA.
Citibank said a total of 68 billion yuan of yuan-denominated bonds had been issued in Hong Kong, with 50.5 billion yuan still outstanding.
But as the potential primary offshore yuan centre, the number of yuan investment products in Hong Kong still remains relatively small.
'For Hong Kong to strengthen its status as an offshore centre, it would need to establish a renminbi benchmark interest rate and offer more renminbi investment products,' said Lu. The Ministry of Finance would probably have more bond offerings this year to help Hong Kong establish its yuan benchmark interest rate.Topics: Bank of China Debt Financing