UPDATE: China, Hong Kong Sign Pact To Expand Yuan Business In Hong Kong

China and Hong Kong signed an agreement Monday to remove some restrictions on yuan usage and its circulation in Hong Kong, which will boost circulation of the yuan outside China and mark a step forward in the gradual internationalization of the Chinese currency.

The agreement will allow more yuan-denominated investment products to be offered in Hong Kong, such as insurance policies and wealth management plans, and more customers will open yuan accounts here, the Hong Kong Monetary Authority said Monday. However, the city's de facto central bank warned local banks to guard against potential money laundering activities and counterfeit yuan banknotes.

Demand for the yuan is increasing in Hong Kong, due to closer trade and economic ties between China and Hong Kong. In the first six months of this year, the value of trade settlement in yuan totaled CNY70.6 billion, with settlements via Hong Kong accounting for 75% of the value, the People's Bank of China said, adding the figure represents a sharp increase from CNY3.6 billion in the second half of 2009.

The revised rules "will speed up the development of the interbank market for yuan in Hong Kong...(It) will also open up more channels for yuan financing," HKMA Deputy Chief Executive Peter Pang told reporters in Hong Kong.

Currently, Hong Kong banks handle simple yuan transactions for customers such as deposits, remittances and trade settlements. BOC Hong Kong (Holdings) Ltd. (2388.HK) is the only yuan-clearing bank in Hong Kong.

Under the revised rules, local banks--as well as BOC Hong Kong--will be able to launch yuan-denominated insurance, securities and fund products in the territory.

There will also be no restrictions on the transfer of yuan funds between different accounts or between different banks in Hong Kong, the HKMA added. The rule applies to corporate clients and individuals.

However, the CNY20,000 (US$2,948) daily yuan purchase cap for individuals remains unchanged, the HKMA said. The is no cap for corporate clients.

Standard Chartered PLC (STAN.LN) said Monday it will soon offer structured investment products that will pay interest in yuan to both retail and wholesale clients in the territory.

"This is a great step forward for yuan liberalization. We believe this will create considerable market opportunity especially as investors are keen to hold yuan as a long-term investment," said Sundeep Bhandari, StanChart's regional head of global markets for northeast Asia.

Hong Kong is establishing itself as the foremost offshore yuan center and has been expanding the scope of yuan-based business since it started taking yuan deposits in 2004. The central banks of China and Taiwan agreed Tuesday to authorize BOC Hong Kong to offer yuan cash settlement services to Taiwan banks operating in Hong Kong, in response to rising demand for yuan and in line with closer cross-strait ties.

-By Chester Yung and Aries Poon, Dow Jones Newswires; 852-2832-2332; [e-mail]