A container ship leaves the Kwai Chung shipping terminal in Hong Kong, China last month.

About 50 percent of Hong Kong’s trade with China may be settled in yuan as exporters reduce their exposure to a weakening dollar, Industrial & Commercial Bank of China (Asia) Ltd. said.

“There has been a perception that the US dollar will continue to weaken,” said Wong. “Definitely on an annual basis, the yuan will probably appreciate against the US dollar around 3 percent to 5 percent. It makes sense for companies to avoid foreign-exchange risk.”

Chinese Premier Wen Jiabao in March expressed concern the dollar will weaken and is promoting greater use of the yuan in transactions with trade partners. Hong Kong’s Chief Executive Donald Tsang wants the city to be the first outside of the mainland to use local-currency settlement, part of a bid to become a yuan finance hub.

China announced the pilot project on April 8, nominating Shanghai and four cities in Guangdong, the southern province bordering Hong Kong. Companies currently have to convert yuan into dollars or other currencies to settle international trade. Wong said the limited program would start “anytime from now” in Hong Kong and that its extension depends on how smoothly it operates.

Yuan appreciation

The Chinese currency has risen 21 percent to 6.8198 per dollar since the central bank scrapped a fixed exchange rate in July 2005. Hong Kong has pegged its dollar to the US currency since 1983 and allows it to trade 5 cents on either side of HK$7.80 versus the greenback. It was at HK$7.75, the stronger end of its trading range, as of 2:52 p.m. local time.

Hong Kong’s total trade with China grew 5 percent last year to HK$2.78 trillion (US$358 billion), according to the statistics department data. After excluding goods shipped on to other countries, about 10 percent of that is between the city and the mainland, HSBC Holdings Plc estimates.

“There’ll be some teething problems but once it gets going the level of yuan settlement will go up,” said Peter Wong, head of the Hong Kong unit of HSBC, the city’s biggest bank by deposits. “If you give it five years it’ll reach a few hundred billion yuan easily.” One hundred billion yuan is equivalent to $14.5 billion.

Convertible currency

ICBC’s Wong also said the program will start slowly. He estimates the pilot companies handle less than 25 percent of the trade and less than 50 percent of that will initially be conducted in yuan. He also said that China will only move gradually toward making the yuan fully convertible for investment, perhaps by 2020.

“China wants the yuan to gradually become freely convertible and play a more important role in worldwide trade and perhaps in worldwide financial markets,” Wong said. “But definitely convertibility is going to be at China’s own pace.”

Hong Kong banks have been able to accept yuan deposits since 2004 and stores have increasingly welcomed payment in China’s currency since 2003. The city’s residents are limited to buying 20,000 yuan per day with their Hong Kong dollars to put in their bank accounts.

Yuan deposits

Yuan deposits in Hong Kong may swell to 100 billion yuan, from 53 billion yuan in March, as companies open yuan accounts to finance trade transactions, Wong predicted. There will also be increased investment in yuan bonds, after Chinese banks sold about 22 billion yuan of such securities in the city.

Hong Kong’s Tsang said on April 18 that the Chinese government will permit the city’s lenders to sell yuandenominated bonds this year.

“They’re lining up to apply to sell yuan bonds in Hong Kong,” said Wong. HSBC, Bank of East Asia Ltd. and a unit of ICBC Asia are seeking to raise money this way, he said.

Yuan in circulation in the city may rise to 100 billion yuan within a year, HSBC’s Hong Kong chief said.

“Being the second-largest economy in the world the currency would have to move faster towards convertibility,” said HSBC’s Wong. “I would say within five to ten years but it’s not going to be full convertibility but probably somewhere in the middle.”

Source: Bloomberg