One small step for yuan business
Tony Latter (Visiting Professor, University of Hong Kong)
(This article originally appeared in the December 2, 2003 issue of South China Morning Post in Hong Kong and is reproduced here with permission from the publisher)
The measures recently announced to allow Hong Kong banks to conduct limited forms of yuan business, although modest in scope and scale, are unreservedly welcome. They enable banks to provide intermediation services, which hitherto have been carried out - if at all - through a number of other, less efficient channels. Both individuals and certain retail businesses should find the management of their yuan requirements considerably less cumbersome.
But the mainland authorities are certainly not giving anything away. As the condition for allowing banks to transfer yuan to the mainland to earn interest, they require that the proposed deposit facilities be offered only to Hong Kong residents, that the exchange facilities be confined to individuals or tourist-related activities, and that yuan remittances be passed only between accounts bearing the same name.
These restrictions should together ensure that no new route for outflows from the mainland will be opened, which might threaten to make their capital control regime even leakier than it may already be. The intended arrangement for channeling yuan back across the border is also tailored to avoid any significant disturbance to interbank relationships.
Despite the general attraction of the scheme, it is hard to see how banks in Hong Kong are going to make much money out of it. They will be dealing mostly with rather small accounts and relatively high cash-handling volumes, both of which are costly to administer; and the current low level of renminbi interest rates provides little scope for banks to make a profitable turn - still less so if they offer customers any interest on the yuan deposits.
But such considerations are unlikely to deter banks from participating, since they will doubtless regard the present move as a prelude to more significant liberalisation and will wish to position themselves accordingly.
For the moment, probably the greatest benefit will be felt among retailers, restaurants and other tourist-spending outlets, where the ability of mainlanders to use yuan debit and credit cards will effectively do away with the current spending constraint implied by the official limit - to the extent that it is observed - on physical cash which mainlanders can bring with them. This, potentially, could have a significant effect, more so as the credit card spending habit spreads among mainlanders.
The one slightly negative nuance in the announcement is that the scheme is to run only on a trial basis. Is it really conceivable that banks should go to all the effort of launching these new services, that the Monetary Authority and People's Bank should go through all the procedures for appointing a clearing bank to route yuan back across the border, and that such a bank should then invest heavily in getting the system up and running - only for the entire operation, for some reason or other, to be terminated? I think not; this sort of move ought to be irreversible and I suspect that all the potential players are treating it as such. It would require a pretty devastating turn of events to justify even considering aborting the arrangements. Even so, we have not been told how the trial is to be judged, or for how long it is to run before the arrangements may be deemed permanent.
In a strictly literal sense, this move does nothing, of itself, to consolidate Hong Kong's role as an international financial centre, since all the activities will be conducted within the one nation for the account of residents of the one nation.
However, by serving as a small first step for our institutions to gain familiarity with yuan business, and with the hope that more steps will follow, Hong Kong will become better equipped to market yuan financial services competitively to the rest of the world when the mainland eventually lifts its capital restrictions.
This would be the truly international dimension to which Hong Kong aspires, and is the real prize we are fixing upon. But the going will get a lot tougher; mainland cities will be competing vigorously in that eventual contest.