While Hong Kong banks welcomed Beijing's initiative to let them make yuan-denominated loans to companies operating in Qianhai, analysts warned the amount of new business would be small, at least at first, and not lucrative.
Hong Kong Association of Banks chairwoman Anita Fung Yuen-mei said that allowing Hong Kong banks to lend yuan funds to borrowers in Qianhai, a small district west of Shenzhen that aspires to be a financial hub, would increase the volume of cross-border transfers of yuan funds.
That, in turn, would help speed up the internationalisation of the yuan and strengthen Hong Kong's role as an offshore yuan trading centre, she added.
The Shenzhen branch of the People's Bank of China (PBOC) announced on Thursday provisional regulations under which companies registered in Qianhai with bona fide operations and investment could borrow yuan loans from Hong Kong banks. Such loans must be used for Qianhai's construction and development purposes.
The PBOC's Shenzhen branch has the right to control the volume of such lending, based on the condition of Hong Kong's yuan business development, Qianhai's loan demand and the mainland's macro-economic policies.
Although the rules allow the interest rates, duration and actual purpose of the loans to be determined by the lenders and borrowers, analysts said the loan volume and profitability might not meet some people's expectations.
"Such loans will be subject to some kind of quota, and given the tight supply of offshore yuan, banks in Hong Kong will have to offer high interest rates to borrow yuan in order to conduct yuan lending business," Citic Securities (HK) analyst Steven Chan said. "I don't think the profit margin will be good."
Core Pacific-Yamaichi analyst Timothy Li said the additional business from Qianhai, a little-developed reclaimed 15-square-kilometre special zone an hour's drive from Hong Kong, would be relatively limited, given yuan funds only accounted for 8.6 per cent of Hong Kong banks' total deposits.
Some 37 firms, including international banks, have signed non-binding agreements to pour investments in Qianhai worth more than 300 billion yuan (HK$368 billion).