The central government yesterday gave the nod to mainland lenders to issue renminbi bonds in Hong Kong, marking a breakthrough in its currency polices and taking another step closer to a fully-convertible yuan.

This is the first time the mainland has opened a capital account in an overseas center following it so doing on its own current account a few years ago.

The capital account tracks an economy's movement of funds for investments and loans, while the current account tracks transaction flows such as in goods, services and interest payments.

At a press conference, Hong Kong Financial Secretary Henry Tang announced the Special Administrative Region (SAR) would discuss precise details next week with the People's Bank of China, the mainland's central bank.

The central government is also considering letting the yuan be used to settle payments for mainland exports to Hong Kong, he said, adding that no timetable has been set.

Hong Kong Chief Executive Donald Tsang welcomed the move. "This new category of renminbi business is conducive to business opportunities for banks and enhancing financial flows between Hong Kong and the mainland," he said.

Local economists forecast a greater role for Hong Kong in the reform of the country's foreign exchange regime, as the SAR enjoys a wider opening-up.

"The RMB bond issue is a significant opening of yuan-denominated services," said Frances Cheung, an economist with Standard Chartered Bank. "We foresee more openings in the future."

Some even predict the central government may soon allow the yuan to be fully convertible in the city on a pilot basis.

Hong Kong is viewed as a testing ground for the mainland for innovations in its foreign exchange regime and offshore yuan businesses. The SAR has become a proxy for foreign investors wishing to gamble on yuan appreciation.

Four types of yuan businesses namely deposits, withdrawals, exchanges and remittances have been allowed in the SAR since February 2004. By November, a total of 22.6 billion yuan ($2.89 billion) was held by 40 Hong Kong banks as deposit.

The deregulation will directly benefit mainland banks, giving them a new fund-raising platform apart from listing and retail banking, economists said.

Three policy banks China Development Bank, The Import-Export Bank of China and Agricultural Development Bank of China could be the first batch of financial houses permitted to conduct the business, said an analyst who declined to be named.

"Mainland commercial banks have various ways to tap Hong Kong's equity market," he told China Daily. "It is policy banks that urgently need fund-raising channels," he added.

(China Daily January 11, 2007)