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Beijing may use Hong Kong as No. 1 foreign exchange

China is looking into the possibility of using Hong Kong to handle more foreign exchange trade so as to help maintain the stability of both of their currencies, China central bank governor Zhou Xiaochuan (周小川) said yesterday.

Zhou, head of the People's Bank of China (PBOC), told a gathering that the PBOC "will borrow from Hong Kong's experience to develop a yuan payments system and a settlement system for yuan-denominated debt."

He said that with the stengthening of China's foreign exchange market, the central bank will use Hong Kong's highly efficient system to carry out foreign exchange trades.

Zhou disclosed that a settlement system has been set up in neighbouring Guangdong province in order to manage the flow of funds between the two areas.

"The PBOC is working closely with the HKMA (Hong Kong Monetary Authority) to counter fake currency and money laundering in view of the increasing circulation of yuan in Hong Kong," he said.

Zhou made his comments whilst reiterating that Beijing planned no early change to its pegged exchange rate system, despite growing US and international calls that it do so, and will only consider the issue in the longer-term.

"Certainly in my mind there is a road map [for change] but recently there has been too much noise and this has caused hot money to come into China," Zhou said.

"We have observed some abnormal capital entering our capital account but this is small. If the inflow is small and diversified then this does not matter. China is a large economy and can absorb the capital inflow -- but we do not like this," Zhou said.
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