You could practically hear the bankers in Central salivating this week. On Monday, the Hong Kong Monetary Authority signed a deal with the People's Bank of China that goes a long way towards developing real yuan-denominated financial services in Hong Kong. You probably wouldn't have guessed that from the HKMA's vaguely worded statement, which blathered about an agreement 'to strengthen co-operation and further promote Hong Kong's status and role as a renminbi market platform'. In reality, however, the latest deal dismantles some major barriers to business. Firstly, it gives the go-ahead to ordinary corporations and non-bank financial institutions to enter the market by allowing them to open yuan-denominated accounts and borrow in yuan for the first time. Secondly, it opens the door to yuan-denominated investment products. Thirdly, and most significantly, it allows Hong Kong's banks to deal in yuan among themselves, rather than only with the PBOC's designated clearing bank. In other words, it gives the green light for the development in Hong Kong of a real offshore interbank market in the yuan. The city's bankers were quick to take advantage of their new freedom. By the following day, both Standard Chartered and HSBC had rolled out yuan-denominated structured investment products allowing holders of the currency to take views on markets like the US dollar-euro exchange rate or short-term US interest rates. Meanwhile, HSBC Insurance announced that customers could now pay their premiums in yuan, while China Citic Bank Corp and ICBC (Asia) transacted the city's first US dollar-yuan currency swap. Yet although this week's lightening of restrictions is a significant step, its importance is likely to remain more symbolic than material for some time to come. Permitting a yuan interbank market to operate in Hong Kong is a major concession by the mainland authorities. But initially, at least, the market will remain small. As the first chart below shows, total yuan deposits in Hong Kong came to 85 billion yuan (about HK$97 billion) in May. That might sound like a lot of money, but it's a tiny 1.5 per cent of the city's deposit base. More than twice that amount turns over in the Hong Kong dollar money market every day. Hong Kong's yuan deposit base will certainly grow following the latest relaxation of restrictions. That's because settling import and export payments in the mainland currency will become a lot more attractive for offshore companies now that banks can offer them a wider range of yuan-denominated services and investment products. Yet the yuan has a very long way to go before it gets widely adopted as a trade settlement currency. It's now a year since the mainland authorities introduced their pilot programme to allow selected importers and exporters to settle their trades in yuan, and the scheme has been expanded rapidly. Yet in the three months to May, only 33 billion yuan of the mainland's foreign trade deals were settled in the mainland currency (see the second chart). That's a touch less than 0.7 per cent of the mainland's total trade. So far, the vast majority of yuan-settled trade deals have been imports into China. According to HSBC, that's partly because exporters have had trouble claiming value-added tax rebates on yuan-settled trades. But the difficulty of obtaining yuan offshore to pay mainland exporters has surely been a factor. Even with the new measures, that difficulty won't vanish for trade counterparties based outside Hong Kong. If you can't get yuan, you can't pay for your purchases in yuan. And if you have to take the currency all the way to Hong Kong to bank it, it won't be much good to you if you are sitting in Siberia, or Brazil, or Zambia. Internationally, that reluctance is compounded by scepticism about Beijing's intentions towards the yuan. There was a big fuss a month ago when the PBOC announced it was abandoning its temporary peg to the US dollar. But expectations of a rapid appreciation in the currency or even of a gradual upward crawl were quickly dashed. As the third chart below shows, after an initial rise, the yuan has actually weakened against the dollar over the past three weeks. Yesterday, the yuan was just 0.7 per cent stronger against the dollar than immediately before the PBOC's announcement. Many currencies fluctuate more in a single day. As a result, hopes of a fast appreciation are unlikely to persuade many offshore punters to hold yuan. The yuan's appreciation, just like its adoption as a widely used currency for denominating international trade and investment, is going to be a very long-term game. Hong Kong's bankers may be salivating, but they are going to have to wait a mighty long time before they can really tuck in to the feast.