A milestone in yuan going global

The first batch of cross-border yuan loans was officially signed on Monday, with Hong Kong-based banks providing about 2 billion yuan to companies set up in Shenzhen's Qianhai district. The move has not only given a big push to Hong Kong's drive to develop itself into the premier center for offshore yuan businesses, but also marks a new milestone in the globalization of the Chinese currency.

Hong Kong's yuan business is about to experience a somewhat bottleneck, with its accumulated yuan liquidity pool hardly finding sufficient financial products to invest in. The kickoff of the cross-border yuan loan scheme has provided a new channel for yuan capital in the offshore market to earn more decent profits in the onshore mainland market.

The mechanism has also offered Hong Kong a new edge over other international financial centers such as London and Singapore, which are also eagerly vying for a bigger slice of the growing offshore yuan market.

It's of even greater significance to the nation as a whole, as the move signals another big step toward capital account liberalization -- one of the key pre-conditions for the Chinese currency becoming fully globalized.

Simultaneously, it signifies a major stride forward in the nation's efforts to marketize or liberalize interest rates as part of the central government's on-going efforts to reform the financial sector and ultimately rebalance the country's growth model. This is due to interest rates for the cross-border loans being negotiated and agreed upon by the lenders and borrowers based on market dynamics. Such a mechanism provides a reference for the People's Bank of China in reforming its management of lending rates on the mainland.

With this new loan arrangement, plus bilateral trade settlement in yuan, RMB FDI and RQFII, Hong Kong is better equipped to serve as the testing ground for the nation's financial reforms and economic rebalancing.

(HK Edition 01/29/2013 page1)