Hong Kong's de facto central bank would have access to yuan from the mainland central bank for three years, whenever the city needed 'short-term liquidity support', the PBOC said yesterday.

Currency swap lines allow the authorities to tap funds from each other and lend to companies in those jurisdictions.

The HKMA said the agreement was aimed at providing short-term liquidity to mainland operations of Hong Kong banks and Hong Kong operations of mainland lenders.

Hong Kong lenders on the mainland and mainland banks in the city mainly rely on their own funding.

'However, now they can obtain contingency liquidity if they are suddenly short of local currency,' said Benjamin Hung Pi-cheng, the chief executive of Standard Chartered Bank (Hong Kong).

Among similar recent moves, the finance ministers of 13 Asian nations, including China, South Korea and Japan, agreed in May to create a pool of at least US$80 billion in foreign-exchange reserves to be tapped to protect their currencies.

Financial Secretary John Tsang Chun-wah said the swap agreement was a policy measure of the central government to further support Hong Kong's economic development.

'It will help to maintain Hong Kong's status as an international financial centre,' Mr Tsang said.

HKMA chief executive Joseph Yam Chi-kwong said: 'The establishment of a currency swap arrangement will help to address contingent needs and maintain financial stability. The aim is to make it easier for banks in Hong Kong and the mainland to get liquidity in both places.'

Hong Kong banks had about 400 billion yuan in assets on the mainland, Mr Yam said. 'It will also promote the development of [yuan] business, such as for trade settlement.'

Billy Mak Sui-choi, an associate professor at Hong Kong Baptist University, said the move could facilitate the development of yuan trade settlement if lenders were allowed to borrow yuan from the de facto central bank. 'It will be a breakthrough if banks are allowed to lend in yuan.'

The swap, which can be extended after three years, is one of 14 measures unveiled last month by the central government to help Hong Kong weather the global financial crisis and economic downturn.

The central government has said it will support Hong Kong in expanding its yuan business and agreed last month to allow Hong Kong and Macau companies to use yuan to settle trade in goods with partners in Guangdong and the Yangtze River Delta.

An industry source expects yuan trade settlement details could be finalised by regulators in the first half of this year. This could allow yuan trade finance by lenders to their customers and yuan conversion by enterprises which is restricted at present.