Brokers and fund managers in Hong Kong are keen to see the launch of yuan share issues or yuan funds to take advantage of Beijing's plan to broaden the range of yuan-based services that Hong Kong financial institutions can offer. But they warn that there are plenty of technical problems that need to be cleared up first. They want clearer guidelines on application procedures for issuing such yuan products in the city. Most importantly, they want to know how companies in Hong Kong can use the yuan they raise in the city for their operations on the mainland. 'Many investors are betting on the appreciation of the yuan. As such, a yuan initial public offering or yuan fund launch is likely to attract great retail interest,' said Joseph Tong Tang, an executive director of Sun Hung Kai Financial. 'There are some companies that are interested in issuing yuan shares through a listing in Hong Kong. But the key issue for them is how they can use these yuan funds raised in Hong Kong back in China. 'Since the yuan is not yet fully convertible, all fund flows into China will need approval by the mainland authorities, which can be a lengthy process. 'In addition, there is only about 80 billion yuan (HK$92 billion) in deposits in Hong Kong, which is not enough to support many yuan IPOs. These issues need to be fixed before we can see yuan shares trade in the city.' Hong Kong Monetary Authority chief executive Norman Chan Tak-lam said last month the People's Bank of China was likely to lift some restrictions on yuan transfers this month - which would allow more yuan products to be launched and could further Hong Kong's development as an offshore centre for the yuan and help it become an international currency. The proposed relaxation, expected to be announced by the PBOC this month, will allow investors to transfer yuan funds to brokers and fund houses, a move that will enable companies to make initial public offerings in yuan, while fund houses can sell yuan funds, brokers can trade yuan shares or yuan bonds for investors, and insurance companies can handle yuan settlements. Banks can presently only handle simple yuan transactions for customers, such as deposits, remittances and trade settlements. Mainland companies listed in the city issue shares denominated in Hong Kong dollars while most funds and life insurance policies are either issued in Hong Kong or in US dollars. Deputy Secretary for Financial Services and the Treasury Julia Leung Fung-yee said once the proposed relaxation is announced by Beijing this month, financial institutions would immediately be free to launch yuan financial products, but she admitted technical issues remained. To address these concerns, she said, the government would consider together with the mainland government issuing guidelines on procedures and conditions under which companies could apply to transfer funds to the mainland. 'Companies that raise funds through yuan share IPOs or yuan bonds can apply to transfer the money back to the mainland for setting up new ventures, paying the wages of their mainland workers or settling bills presented by their mainland suppliers,' Leung said. 'The mainland authorities will approve these deals on a case-by-case basis and a guideline may be issued by the mainland authorities.' Hopewell Highway Infrastructure has planned to become the first Hong Kong non-bank company to issue a yuan bond to institutional investors to finance its projects on the mainland. The company, which builds tunnels, roads and related infrastructure on the mainland, has not announced the amount of the bond offering but brokers say it has secured approval in principle to use the proceeds to finance its mainland projects and the offer may follow in the next two weeks. But Tong said since such approval would be on a case-by-case basis, many companies would not like to take the risk of planning bond or share issues in yuan in Hong Kong. 'What will they do with the yuan raised in Hong Kong if they have a yuan IPO and then later find out that they cannot get approval from the mainland authority to transfer the money to the mainland?' he said. 'If they have to wait and get the approval for the transfer before the listing or bond issuance, the companies may miss the best timing for the IPO or bond offer. It will be just much simpler for them to raise funds in Hong Kong dollars.' Leung also admitted it would be challenge to make a yuan share offering or yuan bond retail offering. 'It is likely we will first see some yuan products target institutional investors before we see some retail yuan products or some exchange trade yuan shares,' she said. Fund houses are also mulling issuing yuan funds in the city. Oscar Wong Sai-hung, the chief executive of ICBC (Asia) Investment Management, said the company could easily use turn existing funds into yuan products by quoting prices in yuan. 'Since many investors expect the yuan to appreciate, a yuan fund is a good selling point,' Wong said. But fund houses will need to bear a currency risk because if they collect yuan from investors but the funds are investing in Hong Kong stocks or other overseas assets, the fund houses will need to bear the valuations losses from any appreciation in the yuan. Wong said, however, that they could use forward contracts to hedge currency risks. The real challenges involving yuan funds, he said was the fact that yuan share regulations had a lot of grey areas. Another international fund house's chief executive, who did not want to be named, said neither the government nor the Securities and Futures Commission had told the industry how and when they could apply to launch yuan funds. 'There are still far too many uncertainties on whether foreign fund houses can offer yuan funds. We want clearer guidelines,' he said. 'We do not know if fund houses can open yuan corporate accounts as many banks only open yuan accounts for individuals.' Leung admitted it would need more communication with the industry. 'Any company can open a yuan corporate account now,' she said. 'The problem, to be resolved soon, is restrictions on interbank transfers.' She also said all fund houses could launch yuan funds. But if they offer yuan funds for retail investors, they will need SFC approval. 'The SFC and the insurance commissioner will check on whether these fund houses or insurance companies have sufficient risk management measures in place with the yuan funds or yuan policies,' she said. The insurance sector has already launched yuan policies this year. HSBC, Citibank and its partner MetLife, BOC Life as well as Fubon Bank have all launched yuan denominated policies settled in Hong Kong dollars. Policyholders buying these policies can pay premiums and collect benefits in Hong Kong dollars upon the policyholder's death or when the policies expire, but the amount of Hong Kong dollars received by the policyholders will depend on the yuan exchange rate at the time of settlement. Insurance legislator Chan Kin-por said insurance companies that wished to introduce yuan insurance policies settled in yuan, would need to hedge their exposure by investing in yuan shares or yuan bonds. But since Hong Kong does not have yuan shares and has only a few yuan bonds, they will find it hard to hedge the risks. Leung said the Hong Kong government had been studying these issues with the mainland authorities to see how Hong Kong insurers or fund companies could invest more in yuan-denominated assets. At present, since the mainland has not yet fully opened its market for foreign investors, fund houses or banks can only invest in mainland A shares or bonds through the qualified foreign institutional investor scheme under which mainland authorities issue quotas for investment in mainland stock and bond markets. Leung was optimistic that the mainland would gradually allow more Hong Kong institutions to invest in the mainland markets by way of expanding the QFII or using other methods. 'I am optimistic that Hong Kong's banking system and platform will allow the city to take the role of offshore yuan trading centre,' she said. Since July last year, the city has been allowed to settle cross-border transactions in yuan, but on average there were only about 400 million yuan settlements every month from July until February. The yuan settlement business only took off after the HKMA in February announced measures to allow banks to conduct more yuan business for corporate clients. Yuan settlement reached 7.16 billon yuan in May, up from 2.98 billion yuan in April and 2.53 billion yuan in March.