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.