The expansion of renminbi banking in Hong Kong is a gradual process that must take account of implications for the convertibility of the currency and capital account management on the Mainland.

This was the message from Monetary Authority Chief Executive Joseph Yam in his latest Viewpoint column published today.

Mr Yam said the new measures announced in the Policy Address represent a small but progressive step in a gradual process towards the strategic goal.

Risk factors

"It is only one-and-a-half years since the launch of renminbi business in Hong Kong. While I understand bankers' disappointment, I think we in Hong Kong must also appreciate the risks that too-rapid financial liberalisation might pose to the stability of the financial system on the Mainland."

Noting finance is the core of a modern economy, Mr Yam said Hong Kong's efficient and diversified financial system is the answer to strengthening that core - something that is of strategic importance to the Mainland if strong economic growth and development there are to be sustained. Hong Kong's capital markets, in particular the debt and equity markets, should be used to serve the Mainland's financial intermediation needs.

Talks continue

He said: "One important prerequisite for Hong Kong to play this important role is that the financial system must handle transactions in renminbi - the currency of domestic savings and fund-raising on the Mainland. This is crucial to maintaining the status of Hong Kong as an international financial centre.

"We should work towards attaining that capability without delay, financial stability considerations on the Mainland permitting. This is why we will continue to talk to the Mainland authorities about expanding the scope of renminbi business in Hong Kong, including the provision of banking services to allow cross-border trade to be settled in renminbi, and renminbi-denominated bonds to be issued in Hong Kong."

On whether the rapid development of renminbi banking business in Hong Kong will undermine the Hong Kong dollar's status and stability, Mr Yam said the move will aid the orderly transaction of cross-border economic activities, and Hong Kong dollar will remain the legal tender.