Secretary for Financial Services and the Treasury K.C. Chan said that the Hong Kong Monetary Authority (HKMA) will talk to the People's Bank of China (PBoC) in a bid to raise its yuan quota for cross-border trade settlement.

With the offical yuan clearing bank for trade settlement Bank of China (Hong Kong) using up its initial 8 billion yuan quota, the HKMA was forced to tap into its yuan swap arrangement with the PBoC Thursday. It plans to draw another 10 billion yuan through the arrangement, out of an annual maximum of 200 billion yuan.

Banks without the currency in hand and that need to satisfy immediate customer trade transactions may turn to the HKMA, the city's de facto central bank said.

Chan said Friday that the rapid increase in demand for yuan cross-boarder trade settlement reflects the popularity of the currency among businesses.

"This shows the development of our cross-border trade settlements in yuan is good and fast. We are happy to see it," Chan said, adding that the HKMA can fully cope with demand as the swap line has been activated.

Cross-border trade using China's currency more than doubled to 48.7 billion yuan in the second quarter from the first, according to data from the Chinese central bank.

"As the yuan is forecast to have further appreciation potential, it is attractive for business clients to choose the yuan currency for cross-border trade settlement purposes," Barry Doo, executive director at the Success Wealth Management, told China Daily.

Doo predicted that the yuan will rise 1 to 1.5 percent against the US dollar in the remaining two months of 2010. The yuan appreciated 2.2 percent versus the greenback since a two-year peg was relaxed in June this year.

Doo admitted that with the offshore yuan exchange price in Hong Kong currently is higher than the onshore exchange price on the mainland, it may restrict the development of the yuan trade settlement in the city for the moment.

But he added that given the long-term appreciation of the yuan and the growing importance of China in the global economy, demand will certainly increase in the long term.

Mirza Baig, a Singapore-based currency strategist at Deutsche Bank AG, said that the HKMA's move is significant. "This implies that demand for yuan rose very sharply in the last few weeks and supply is not keeping up," he said. "This may result in some scarcity of the yuan in Hong Kong and to ease that scarcity, the HKMA has tapped the swap facility."

"The very rapid rise in yuan demand is probably also motivated by expectations of renminbi appreciation," he added.

Hang Seng Bank Vice-Chairman and Chief Executive Margaret Leung also said Thursday that the bank will seek an increased yuan trade settlement quota for their clients.

Bloomberg contributed to this story.

China Daily

(HK Edition 10/30/2010 page2)