bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

urlAlias

moreOnThisArticles

sponsorType

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

SCMP Reporter

A limited experiment with yuan capital account liberalisation in Hong Kong is expected to add little strain to the mainland monetary and financial systems.

The central bank chief's revelation on Monday night that Beijing is willing to consider such a proposal constitutes a show of support for Hong Kong's financial industry at a time when the SAR is gripped with widespread anxiety over sorely needed economic restructuring.

People's Bank of China (PBOC) governor Dai Xianglong indicated that Beijing might consider allowing Hong Kong banks to accept yuan deposits.

He also said yuan convertibility in Hong Kong would not be too far off.

Against the backdrop of Beijing's earlier endorsement, in principle, of Hong Kong's appeal for closer economic ties, the speech was interpreted by analysts as another of the central Government's recent gestures to help shore up confidence in the SAR economy.

'It showed Beijing's concern with Hong Kong's economy and its willingness to help whenever it can,' said Salomon Smith Barney senior economist Huang Yiping.

However, Mr Dai's latest statements also fell in line with recent official pronouncements indicating Beijing's renewed interest in full convertibility of the yuan.

The mainland currency is now on a managed float, with full convertibility in the current account and heavy control in the capital account.

Beijing had slowed down moves toward capital account convertibility after the 1997 Asian financial crisis for fear such liberalisation would pave the way for a massive capital flight.

Some analysts have advocated using Hong Kong as a testing ground for future financial reforms on the mainland, such as full convertibility of the yuan.

Close collaboration between the PBOC and the Hong Kong Monetary Authority would give regulators more control over the pace and scope of such pilot programmes, said Zhu Wenhui, a research fellow at the China Business Centre at the Hong Kong Polytechnic University.

Mr Dai's sketchy remarks on Monday left unanswered questions on the nature of the experiments and their timing.

Mr Huang said Beijing was likely to toy with the idea of controlled liberalisation, allowing Hong Kong banks access to yuan holdings already in Hong Kong but retaining strict controls over capital outflow from the mainland.

Such a move, he said, would result in greater fluctuations in the yuan's value but would not necessarily threaten China's exchange rate stability and the health of its banking system.

However, he deemed as 'almost unlikely' bolder moves to allow free flow of capital between the mainland and Hong Kong at this stage.

Such experiments could deal a heavy blow to China's fragile banking industry, burdened with mountains of non-performing loans (NPL), he said.

The system has so far escaped a full-blown crisis because of a fast growth in deposits. The opening could aggravate mainland banks' NPL problems by diverting part of domestic savings to more efficient Hong Kong banks.

Bolder experiments could also create two exchange rate regimes, said Mr Huang. The yuan exchange rate in Hong Kong would be driven by market demand, while the currency remained on a managed float otherwise.



Record yuan loan to Australian miner makes good sense

China’s push to promote its currency accelerates with landmark Fortescue loan

China grants Hong Kong new yuan quota as Payment Connect kicks off for 315 million users

Saudi sukuk ETF begins trading in Hong Kong’s landmark launch of sharia-compliant bonds

Bank of China (BOC)

Yuan stress expected to be minimal