Governor Zhou Xiaochuan of the People's Bank of China (PBOC), China's central bank, and Chief Executive of the Hong Kong Monetary Authority (HKMA) Joseph Yam signed Wednesday a cooperation memorandum which allows banks in Hong Kong to conduct RMB business of deposit, renminbi yuan-HK dollar exchange, cash remittance and credit card services.
Economists said the landmark agreement will bring the following benefits:
Materializing central government's support to Hong Kong: Chinese government chooses Hong Kong as the first site for RMB business. It is because Hong Kong has its own advantages in banking, and meanwhile, shows central government's assistance to Hong Kong under the frame of one country, two systems. Beforehand, the mainland had signed the Closer Economic Partnership Arrangement (CEPA) with Hong Kong and allowed mainland people to travel in Hong Kong freely.
Prompting Hong Kong's economic development: in recent months, with the improvement of global economic environment and support from central government, Hong Kong's economy began to recover. The agreement will further strengthen Hong Kong residents' confidence of their economy, speedy economic cooperation between the mainland and Hong Kong and solidify Hong Kong's status as an international financial center. It also makes preparation for Hong Kong's development into an RMB settlement and offshore center in the future.
Facilitating fund circumfluence: in recent years, a large amount of RMB rushed to Hong Kong while much less return to the mainland. It is estimated that at present as much as 10s of billions of RMB are in Hong Kong. Since the mainland still restricts foreign exchange floats and RMB has not yet fully realized conversion, the agreement will help RMB in Hong Kong flow back.
Preparing for RMB's full conversion: some experts maintain carrying on RMB business in Hong Kong was a step before the eventual full conversion of RMB and could somewhat relieve the press of RMB revaluation. RMB is now convertible only under current accounts and the country is researching how to realize capital accounts' full conversion without bringing about economic risk.
Just like the CEPA, the best beneficiary of the agreement is Hong Kong. Its banks, especially settlement banks, will gain huge interest and can accumulate experience to develop mainland markets in the future. At the same time, tourism, retail and relevant industries as well as consumers in Hong Kong also have benefits.
The agreement will let funds flow back to the mainland normally and increase mainland banks' business. Traveling from the mainland will be more convenient as people can spend in Hong Kong with RMB.
There are also some problems. As the interest of RMB is higher than that of the HK dollar, large amounts of HK dollars may be exchanged to RMB and thus influence exchange rates of the HK dollar; if the financial system of Hong Kong will be affected; how to avoid impact on RMB; and how to prevent tax evasion, money laundering and state assets escaping. The agreement has made some regulations on these problems and the two sides need to cooperate more closely to settle the problems, according to the economists concerned.
(China.org.cn by Feng Yikun and Daragh Moller, November 21, 2003)
