Further development of renminbi banking in Hong Kong depends on the pace of financial liberalisation on the Mainland, Monetary Authority Chief Executive Joseph Yam says, adding Hong Kong's banking system should be prepared to take advantage of such new developments.

In his latest Viewpoint column on the authority's website,

Mr Yam said Hong Kong successfully implemented earlier this year personal renminbi deposit taking, renminbi exchange, renminbi remittance services and renminbi credit cards.

"These four initiatives in effect create, in terms of the balance sheets of banks in Hong Kong, assets and liabilities denominated in renminbi. As a modest and cautious start, the coverage of these assets and liabilities is quite limited," he said.

On the asset side, there is only the renminbi deposit balance with the Bank of China (Hong Kong), which is the settlement bank and the conduit for the formal repatriation of renminbi, through retail deposits taken in Hong Kong, back into the Mainland.

On the liability side there are only the personal renminbi deposits taken from individual Hong Kong residents.

"Strategically, we should build on these initiatives by exploring how renminbi assets and liabilities on the balance sheets of banks in Hong Kong could be diversified in a manner that is helpful, or at least without undermining, the relevant policies of the Mainland," he said.

"On the liability side, for example, the diversification of deposits from just resident individuals to non-residents and non-individuals is a possibility. On the asset side, the trading of renminbi assets in Hong Kong could, with the agreement of the Mainland authorities, also be explored."

Free access to foreign exchange

Mr Yam said Mainland current account transactions are no longer subject to exchange controls.

"For example, tourists from the Mainland are basically allowed free access to foreign exchange. Indeed, they can either buy Hong Kong dollars on the Mainland for spending here or, more conveniently, bring renminbi to Hong Kong for tourist spending, although there are various caps on the amounts involved."

Mr Yam said, for the purpose of further promoting trade between Hong Kong and the Mainland, the use of renminbi as the currency of trade between the two places, where the trade partners prefer, could be explored.

"The financial infrastructure in Hong Kong will need to be suitably enhanced to cope with this, but given its present level of sophistication and the experience gained from constructing and operating payment systems of other currencies, this should not be too difficult."

Financial stability most important

Mr Yam said the prospects for further development in the use of renminbi in capital account transactions between the Mainland and Hong Kong are obviously dictated by the programme of capital account liberalisation on the Mainland.

"Financial stability is of utmost importance to the Mainland's economic development and, given our close relationship with the Mainland economy, for Hong Kong as well."

He said there could be specific areas in which relaxation could be cautiously introduced to assist in the testing or implementation of the liberalisation programme, and in strengthening or rationalising existing policies on the circulation and use of renminbi in Hong Kong.

One specific area that has been suggested is the issue of renminbi bonds in Hong Kong, he said.

"Depending on who the issuers and investors are, this could be structured in such a manner, for example, as to assist the repatriation of renminbi back to the Mainland and the diversification of renminbi assets of those banks in Hong Kong offering renminbi services."

"The Government will now study the subject further and will, in due course, put forward formal proposals to the State Council for consideration. It should, of course, be stressed that any new initiatives will take time and will not happen overnight.

"However, it is important that banks should position themselves, as far as possible, so that they can take advantage of any development in what must be potentially a major area of banking business in Hong Kong."