The Hong Kong Monetary Authority announced new measures yesterday to boost the city's yuan business as the currency hit a record high.
HKMA chief Norman Chan Tak-lam said the move would "deepen and enhance" Hong Kong's role as a clearing and trading centre for the yuan.
While the currency is not fully convertible, Beijing has relaxed rules since 2009 to encourage international businesses and investors to settle trade and investment deals in yuan.
The HKMA's measures came as the currency climbed to a 19-year high against the US dollar amid strong growth in the use of the yuan for worldwide trade and investment. It is now the 13th-most used currency for international payments.
From June, Hong Kong will introduce what Chan said will be the world's first offshore yuan interbank rate fixing. Each day, a group of the city's bankers will set the interest rates on interbank loans with tenures from overnight to 12 months.
At present there is no benchmark rate for yuan loans and banks determine the rate for loans individually. Chan said the fixing would encourage banks to offer more yuan loans and other yuan interest rate products.
"It will become an important milestone in further enhancing the status of Hong Kong as an offshore yuan centre," he said.
Chan said the HKMA had also decided to relax two regulatory requirements. First, it will remove the yuan net open position limit. This regulatory tweak puts Hong Kong on a par with Taiwan, where there is no such limit.
It also lifted the 25 per cent minimum liquidity ratio for yuan. After these changes, the requirements pertaining to the yuan would be the same as for any other non-local currency.
The two restrictions were put in place to prevent banks rushing to do too much yuan business when they were first allowed to enter the market.
Total yuan deposits in the city grew to 810 billion yuan at the end of last month, up 30 billion yuan from February. Hong Kong banks handled 830 billion worth of yuan trade in the first three months of the year, up 45 per cent from a year earlier, Chan said.
Anita Fung Yuen-mei, chief executive of HSBC's Hong Kong office, said: "The yuan interbank rate fixing will mean the city will become a centre to set the benchmark rate for offshore yuan lendings. This will strengthen its leading position as an offshore yuan centre."
Lawmaker Christopher Cheung Wah-fung said many overseas markets - including Singapore and Britain - were trying to become offshore yuan trading centres. "It makes sense for the HKMA to change the rules to make sure Hong Kong can fend off its rivals," he said.
Hang Seng Bank executive director Andrew Fung said: "It is a confirmation we are the yuan offshore centre of all centres."
Australia's central bank has said it would invest 5 per cent of its foreign exchange reserves in yuan government bonds, about A$2.4 billion (HK$19.2 billion).