Hong Kong is poised to benefit in the long term as a yuan repository following the debut of the currency's trade finance settlement policy in July. However, it is unclear how many exporters will opt for the new settlement arrangements, according to Simon Gleave, partner in charge of financial services, KPMG China. He said that the immediate effect of the policy would probably be minimal. The cross-border settlements are part of a pilot programme introduced by the central government which applies to more than 400 selected exporters in five mainland cities - Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan - and Hong Kong, Macau and Asean countries. 'Although the volume of trade coming out of the mainland is huge and there is a concomitant amount of business requiring settlement, not much of it is occurring in yuan. This is because we're in a buyer's market and exporters who are trying to maintain their market share and position don't have the ability to impose yuan settlement terms on people who buy their goods,' he said. The scheme is intended to give exporters an opportunity to counter the risk of exchange rate fluctuations in settling trade. According to Anthea Wong, partner and China business advisory service at PricewaterhouseCoopers, if pilot enterprises decide to settle in yuan they will be able to mitigate their exchange rate risk so that they can implement better cost controls. 'With the appreciation of the yuan against the US dollar over the past 18 months exporters' operating costs have escalated, which has created pressure on their margins. Using the yuan as the currency for settlement will enable these companies to better project their revenues,' she said. The other immediate benefit will be a reduction of transaction costs. Most transactions are conducted in foreign currency. So if a cross-border transaction between a Hong Kong company and a mainland entity is conducted in US dollars, for example, it means two currency conversions, one in Hong Kong and the second back to yuan on the mainland. Apart from the potential exchange loss there are two sets of bank charges. Wong said the scheme removed one set of conversion costs and charges and would benefit all trading parties concerned. 'Yuan trade settlement will definitely be conducive for cash and treasury management. Imagine a situation where an entity on the mainland purchases its raw materials in yuan and trades in yuan. This consistency of currency is going to be beneficial for a company's cash and treasury management projections,' she said. The settlement policy is changing some business practices for exporters and accountants are advising on these accordingly. For example, under the pilot scheme, enterprises are no longer subject to the foreign exchange verification procedure, which is normally required for cross-border trade with the mainland. Exporters used to providing their local tax authority with a foreign exchange verification receipt to apply for a value-added tax refund need no longer do so. 'The new policy stated that this receipt is not required when a mainland entity applies for a VAT [value added tax] refund so we are following this up with the tax authorities and monitoring the actual implementation,' Wong said. She said that in the medium to long term, the policy would probably be expanded to more locations and more entities, both mainland and foreign-invested, and advised companies to conduct an impact study on the potential benefits that yuan settlement would have on their practices. If a company changed its settlement currency to yuan there would be implications on the amount of customs duty it paid the authorities. 'It would be helpful for companies to look for an arm's length price that is acceptable to the customs and tax authorities,' Wong said. 'This is an ongoing process and it will be an evolving policy and scheme. What we're seeing now is use of yuan as the currency for trade settlement. We hope that it can also be used for other purposes such as for the settlement of non-trade items, perhaps even for investment,' she said. Retailers in Hong Kong including 7-Eleven, Watsons and Marks & Spencer have accepted yuan for payments from mainland visitors since 2003, but handling the currency is complex for businesses. The mainland does not allow it to be traded on open markets and it cannot be used outside the country. The decision to allow trade settlement in yuan puts Hong Kong in a position to benefit from future expansion of these trade flows. Gleave said: 'Just the sheer amount of people flowing across the border and the integration of Hong Kong into the Chinese economy over time means that there needs to be a lot more business in yuan between Hong Kong and the mainland. This settlement scheme is going to spearhead that.'