People's Bank of China governor Dai Xianglong says Hong Kong will be the testing ground where Beijing tries out the yuan's convertibility on the capital account. 'The trend is for the yuan to become fully convertible. But before the yuan is convertible, Hong Kong will be given priority to attempt any new product launches,' he told a Hong Kong General Chamber of Commerce dinner last night. 'I am aware that Hong Kong people have yuan and the yuan is accepted in Hong Kong and neighbouring places such as Macau [for purchases]. People have suggested that Hong Kong banks accept yuan-denominated deposits. I believe this proposal is worth considering.' The yuan is convertible only on the current account. His comments are the most explicit indication by a senior Chinese official that the SAR will be the place where China attempts to speed up its currency liberalisation. Such a move will help expand Hong Kong banks' business portfolios by allowing them access to yuan business. The majority of Hong Kong banks are smaller sized and cannot reach the minimum US$20 billion asset requirement Beijing sets for foreign banks to set up branches in China. The benchmark has shut out most Hong Kong banks from yuan business in the mainland. The central banker also stressed the importance of the Bank of China to Hong Kong's future, despite the recent scandal surrounding former president Wang Xuebing. He said the affair would not damage the public image of the SAR's second-largest bank, which is undergoing a restructuring to seek a public listing. 'The bank has been established here for 90 years and the recent restructuring demonstrates the importance it attaches to Hong Kong as a financial centre and its future confidence,' he said. 'The bank will continue to make a significant contribution to the SAR's economy . . . and is on track with its own development plans, including listing.' He said China's big-four state banks would cut their non-performing loan ratios to about 15 per cent by the end of 2005. At the end of last year, NPLs stood at 25.37 per cent. Earlier Mr Dai confirmed speculation that an interest-rate cut was being considered. China stocks surged higher yesterday, helped by money flows from the mainland after rate comments. The H-share index closed 3.47 per cent higher at 2,061.41 points, crossing the 2,000-point mark for the first time since July 16. Red chips rose just 0.35 per cent to 1,232.5 points. A broker said: 'Some capital is flowing into Hong Kong and boosting H shares.' The mainland markets are closed until next week.