HONG KONG: Economists are hoping that renminbi financial products in Hong Kong will be further diversified when Chief Executive Donald Tsang announces his fifth Policy Address tomorrow.

In the upcoming policy address, Tsang will highlight several economic issues, including the development of yuan trade settlement and the yuan bond market in Hong Kong, he told the media after his five-day visit to Beijing last week.

Billy Mak, associate director of the Hong Kong MBA class at Baptist University, said the SAR government should allow local financial institutions to provide renminbi loans, so as to strengthen the city's role as an Asian financial center.

"Foreign companies can raise more yuan to support their mainland operations, if renminbi loans are provided in Hong Kong," Mak said, adding that local lenders cannot benefit much from the current yuan deposit service.

Renminbi deposits in Hong Kong, accounting for around 2.1 percent of foreign-currency deposits, have climbed 1.4 percent to 56.7 billion yuan by the end of August, according to the Hong Kong Monetary Authority (HKMA).

Bankers and economists have been urging the SAR government to expand the city's renminbi reservoir to further develop and diversify the yuan business in Hong Kong.

"The central government may also consider issuing yuan sovereign bonds in Hong Kong continuously, which will help build a sustainable bond market in the city," Mak said.

The market has been expecting the sovereign bond, issued by the Ministry of Finance September 28, to enjoy overwhelming subscription from retail and institutional investors, thanks to its high interest rate and extremely low default risk.

Apart from yuan sovereign bonds, Mak also suggested launching yuan-bond related derivatives, for instance yuan bond futures and sovereign bond futures, to facilitate yuan risk-hedging among enterprises and investors in Hong Kong.

The city's renminbi business already went through a major breakthrough in July, as the central government gave a nod to the cross-border yuan trade settlement.

Under the scheme, Hong Kong, Macao and the Association of Southeast Asian Nations are permitted to settle trade transactions in yuan outside the mainland.

The yuan settlement business, however, has attracted little activity from enterprises in its first month of operation.

According to the HKMA, only 66 yuan trade transactions totaling around 42.8 million yuan have been conducted between the mainland and Hong Kong.

The amount was a drop in the ocean when compared with the $203 billion, or 1.39 trillion yuan, cross-border trade transaction between the mainland and Hong Kong in 2008.

Daniel Chan, senior investment strategist at DBS Bank, said enterprises may now prefer the US dollar to renminbi when settling cross-border transactions, given the current depreciation of the US currency.

On the other hand, "people may consider choosing yuan again, after the foreign exchange market and the US dollar stabilize," Chan said.

He noted that yuan transactions have been more or less whittled down by the global economic recession, as overseas orders for mainland goods still remain sluggish.

"The demand for yuan trade settlement will pick up again as the global economy starts to recover," Chan added.

(HK Edition 10/13/2009 page4)