The mainland central bank announced a set of stringent conditions with many restrictions for implementing cross-border trade settlements in yuan last night, in a move to limit the scale of business at its early stage. The much-anticipated policy to allow domestic lenders to offer yuan settlement services with their foreign counterparts took effect yesterday, according to a statement posted on the People's Bank of China's website. Mainland lenders would be allowed to settle trade finance business in yuan by extending loans to foreign banks, but these loans must be for no longer than one month, it said. Industry watchers immediately criticised the loan duration as being too short, saying the lending period normally spanned two to three months. Settlement banks in Hong Kong and Macau will also be allowed to borrow yuan in the mainland interbank market for funding purposes. But the amount is capped at 8 per cent of its total yuan deposits as of the end of last year. These loans could not exceed three months, the statement said. Mainland lenders would be allowed to finance up to 1 per cent of their total yuan deposits as of the end of last year to foreign banks for yuan-denominated trade settlements. The 30-point policy statement listed conditions for banks participating in the pilot settlement business. The central bank had the right to change any of the conditions, it said. Industry watchers said banks might find it hard to fulfil all the listed criteria and some adjustments might be required. 'It will only be like building castles in the air if banks failed to meet all the requirements,' said Louis Tse Ming-kwong, a director at VC Brokerage. 'The rules are not meant to be broken but there must be some relaxation of the policies to become more practical.' Some market watchers said the scheme was a baby step in making the yuan a more global currency. 'The implementation guideline appears to have many restrictions in general,' Federation of Hong Kong Industries deputy chairman Stanley Lau Chin-ho said. 'There is a big question mark on how many Hong Kong exporters can make use of the scheme.' Despite its aim to offer convenience in cross-border trade, the mainland retained a tight grip on the currency system, Mr Lau said. The central bank requires mainland firms selected to participate in the scheme to reveal the whereabouts of their yuan capital outside the country by reporting how much the balance is and at which bank they deposit the money.