Hong Kong chosen for yuan settlement pilot

BEIJING, March 11 -- A pilot project involving yuan-denominated settlement of trade deals would start from Hong Kong, the central bank's assistant governor Guo Qingping said in Beijing.

Guo said cross-border trading activity would benefit from the move. He said the project was likely to be extended to other cities if the pilot project succeeds.

Zhou Xiaochuan, governor of the People's Bank of China or the central bank, had told reporters last week that details of the yuan-settlement process would be released soon without elaborating.

Settling trade deals using the yuan was positive news for Hong Kong-owned mainland factories and this would help control foreign exchange volatility risks, said Stanley Lau, vice-chairman of the Federation of Hong Kong Industries.

Overseas companies would now be able to settle their trade deals in Hong Kong, Lau said, adding the new arrangement would attract more foreign companies to set up shop in Hong Kong.

"They may not need to set up their offices on the mainland, as they can do the settlement in Hong Kong," he said.

However, the global economic crisis has deeply affected Hong Kong-owned mainland factories, Lau noted. He pointed out that the benefits of yuan-settlement was likely to be minimal in the short term as companies are going though tough times.

"The number of orders is dropping substantially, and the new arrangement won't be able to help the enterprises much," he said.

Kelvin Lau, a regional economist at Standard Chartered Bank, said the move would have medium-to-long term impact.

"Providing this settlement service can make Hong Kong a more competitive city," he said. Hong Kong's financial sector has been closely tied to trade over the past 20 to 30 years, Kelvin Lau said.

"Banks play a role as a facilitator of the trading business. If the business can be boosted by the yuan settlement, there is a huge opportunity for banks," he said.

He, however, said the effects of the move might not become apparent in the short run as trade has been hit hard by the global recession.

The limited yuan deposit base is another constraint for the yuan-settlement business, he added.

The People's Bank of China entered into a currency-swap pact with the Hong Kong Monetary Authority (HKMA) on Jan 20, providing liquidity support of up to HK$227 billion.

(Source: China Daily)