Yuan lending set to cross new border in pilot plan

Shenzhen will push for a cross-border yuan lending pilot project this year that will allow banks in Hong Kong and Shenzhen to lend the currency directly to clients in the opposite city, a move that is expected to boost Hong Kong's offshore yuan business.

The Shenzhen city government has included the proposed program into its work schedule for this year, according to a document obtained by China Daily on Thursday.

Direct yuan lending, which will be an important link between the onshore and offshore markets for the currency, will deepen financial reforms in Shenzhen, the document said.

It added that low-cost yuan loans from Hong Kong will be used mainly to develop the yuan financial business of the Qianhai zone in Shenzhen.

The official China Securities News reported on its website that Shenzhen is applying for such a direct yuan lending program with Hong Kong, but Beijing hasn't given its final nod. However, a Shenzhen government official, quoted by Reuters, denied the report about the pilot project.

News about the program helped push up Shenzhen stocks by nearly 2 percent as investors cheered the prospect of easier credit.

The program "will boost the offshore yuan financial business in Hong Kong," said analyst Wilson Chan.

"The pilot scheme will greatly expand the repatriation channels of yuan capital in Shenzhen when Hong Kong banks can lend out their yuan capital to Shenzhen-based firms."

According to the Hong Kong Monetary Authority, outstanding yuan loans in the city rose 16.1 times during 2011 to 30.8 billion yuan.

The pilot plan should also help push up Hong Kong's yuan deposit rates.

"Local banks may need to attract more yuan capital in Hong Kong to (enable them to) lend the currency to Shenzhen-based businesses," Chan told China Daily.

He said this system will improve the supply-demand relationship for the yuan in the city,.

Standard Chartered Bank, in an earlier report, predicted that yuan deposit rates might rise in 2012 due to new repatriation channels for the currency and deposit competition among banks.

Yuan deposit rates in the mainland are generally higher than in Hong Kong, as a one-year fixed yuan deposit carries an interest rate of 3.5 percent in the mainland compared with 0.55 percent in Hong Kong.

The document said the central government will take steps to support the Qianhai zone's development, and foreign firms will be encouraged to establish global settlement centers there.

Firms and banks registered in the Qianhai zone, will be encouraged to issue yuan-denominated bonds in Hong Kong, and the Shenzhen government may also set up a Qianhai area equity exchange this year, the document added.