New pact to allow HK banks to offer yuan services

China and Hong Kong signed a landmark agreement yesterday allowing the former British colony's banks to offer yuan-denominated services in what analysts see as a first step towards full convertability of the Chinese currency.

Analysts applauded the move, which takes effect from January, as it is the first time that Beijing has formally allowed offshore services in the Chinese yuan, which is not fully convertible for capital account transactions.

"This is a partial relaxation of the yuan on the capital account. The move is more important for China than for Hong Kong," said Connie Bolland, an economist at the Economist Intelligence Unit in Hong Kong.

The People's Bank of China, the country's central bank, has agreed to allow Hong Kong banks to offer yuan services to individuals in the territory on a trial basis, with business restricted to personal banking services and not corporate transactions involving capital accounts.

The deal covers deposit-taking, foreign exchange, remittances and credit cards.

While the size of the yuan transactions will be fairly small, Bolland said she expects the amounts to be increased and the scope of the business to widen over time as China edges closer to full convertibility on the capital account.

Hong Kong banks will be allowed to exchange up to a maximum of 20,000 yuan per person per day for holders of yuan deposit accounts. For individuals without deposit accounts, the limit is 6,000 yuan per transaction.

Although the yuan has been convertible for current account transactions since 1996, controls on the capital account have been only partially relaxed.

However, China's entry into the WTO has brought these controls under closer scrutiny and raised the urgency for the country to move to a fully-convertible currency, which is currently pegged at around 8.3 to the US dollar.

Pressure on this issue has increased sharply as several of China's trade partners, especially the US, argue that Beijing keeps its currency deliberately undervalued so as to promote exports unfairly.

Zhou Xiaochuan (周小春), governor of the People's Bank of China, told state press this week that China would speed up efforts to make the yuan convertible to meet the demands of the nation's modernization drive but failed to provide a timetable.

Economists said they do not expect the deal with Hong Kong to affect the currency's stability.