They don't convert their money, and they don't carry travellers' cheques. They remain faithful to their own currency - the renminbi.

About 7 million Chinese mainland tourists visit Hong Kong each year - with tens of billions of yuan in cash.

They shop with great ease in Causeway Bay, Mong Kok and virtually every other famous shopping district in the territory without the local currency - the Hong Kong dollar.

The renminbi is widely circulated.

Nobody seems to know exactly how much renminbi is in circulation in Hong Kong, but analysts suggest it is a significant amount.

A study by Swiss bank giant UBS last year estimated 40 billion yuan (US$4.8 billion) was in circulation in Hong Kong. Some suggest that figure is conservative.

Based on UBS' study, if the number of Chinese mainland visitors to Hong Kong grows 15 per cent annually, and each visitor spends 3,000 yuan (US$360) in renminbi, there will be a stunning 157 billion yuan (US$18.9 billion) in renminbi in circulation by 2005.

It is apparent a flourishing market has developed. It is attractive to any player in the banking industry, but banks in Hong Kong are not allowed to conduct renminbi business.

In what many consider to be encouraging news, Tung Chee-hwa, chief executive of the Hong Kong Special Administrative Region (SAR), said late last month the central government would consider allowing Hong Kong's banks to conduct renminbi business - including deposits, remittances, exchanges and credit card business - for individuals on a trial basis.

The proposal was considered by many to be a follow-up measure to the Close Economic Partnership Arrangement (CEPA), signed on June 29 between Hong Kong and the Chinese mainland, in a bid to revive the SAR's economy.

CEPA strengthens mainland-HK ties and reduces trade tariffs.

Allowing Hong Kong's banks to conduct renminbi businesses will result in the flow of billions of renminbi in cash, which will be properly channelled into the banking system, experts suggest.

Offshore centre

More important, the move is a steady step forward in the mainland's efforts to nurture Hong Kong's development as an offshore centre for the renminbi.

"It is definitely good for the banking industry in Hong Kong," said Qu Hongbin, a senior analyst with the Hongkong and Shanghai Banking Corp (HSBC) in Hong Kong.

"Hong Kong's bankers welcome the news," said Qu.

Raymond Or, HSBC's general manager, said banks would love the renminbi business, as the currency is the second most popular currency in Hong Kong.

As China is under increasing international pressure to appreciate the renminbi, more people are holding on to the currency - hoping their savings will grow.

Vincent Cheng, vice-chairman and chief executive of Hang Seng Bank, also welcomed the news.

He said such a move proved the central government supports Hong Kong.

UBS reported in January that renminbi business would benefit the banking industry in Hong Kong, and would be worth about HK$2.6 billion (US$333.7 million), almost 4 per cent of its total profits, annually.

Still, technical problems must be tackled, especially determining how the flow of the renminbi in Hong Kong will be channelled into the proper banking system.

The renminbi currently cannot be freely converted under the capital account.

Settlement banks, therefore, could be an option.

The Bank of China Hong Kong (BOC HK) last week expressed its desire to be involved in such business.

The bank's officials boasted the bank has numerous advantages, as it is the region's second-largest bank, and the largest foreign exchange bank on the Chinese mainland.

They predicted the bank had a 90-per-cent chance of receiving central government approval.

Cheng Qingbo, an official with the Shenzhen branch of the State Administration of Foreign Exchange, said last Thursday a plan regarding the money flow mechanism had been submitted to the State Council, and that the renminbi in Hong Kong would be channelled into the Chinese mainland via Shenzhen, the port city bordering Hong Kong.

Allowing Hong Kong banks to conduct renminbi business will move the region closer to becoming the offshore centre for the renminbi.

Lots of work must be done before that can happen, analysts said.

Hong Kong has long been tauted as the offshore centre for the renminbi, experts said.

As the renminbi is not freely convertible, Hong Kong would be the natural choice to become the offshore centre for the renminbi until the currency can be freely converted, a Hang Seng Bank report said.

Experts suggest an offshore renminbi centre in Hong Kong would not only facilitate the currency's evolution to convertibility, but would also endorse Hong Kong's position as a leading international financial centre in the Asia-Pacific region.

Increased demands

The Chinese mainland's economic realignment with the world has resulted in increased demands for the renminbi. Those demands will grow as the renminbi's economic power becomes increasingly visible internationally.

The Chinese mainland has maintained exchange control on capital account transactions. Approval is still required to convert the renminbi into a foreign currency to acquire foreign assets or to repatriate funds.

Travellers are allowed to carry a maximum 6,000 yuan (US$724) in cash when they leave China.

As is the case with most developing economies, capital control is essential to protect the Chinese mainland's financial system from excessive capital flows.

Also, the Chinese mainland should be cautious when liberalizing its capital control during the initial years of its World Trade Organization membership, especially given various market uncertainties.

An offshore currency market will inevitably emerge if the pace of capital account liberalization is not synchronized with the growth of external demand for a currency, analysts suggest.

Hong Kong, which has been in the forefront in the renminbi's circulation outside the mainland, is best suited to become an offshore centre, experts suggest.

"But there are also hidden risks," Qu said.

"The possible technical complications associated with relaxing capital control over renminbi deposits in Hong Kong should not be underestimated."

Such relaxation would involve managing money flows between Hong Kong and the Chinese mainland without jeopardizing the mainland's objective of maintaining financial and currency stability.

Over the years, Chinese authorities have remained steadfast. It is unlikely control over capital account convertibility will be liberalized within the next few years.

Thus, any move towards making Hong Kong an offshore renminbi centre must complement the development of the Chinese mainland's financial and currency systems, the Hang Seng Bank said in a report.

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