Central bank chiefs of the Chinese mainland and Hong Kong yesterday inked an agreement allowing Hong Kong banks to offer yuan-based services, a move that represents a small but important step by the mainland towards making the yuan, or renminbi, a hard currency.

The move is also seen as a boon for Hong Kong's economy, as it will boost the city's stature as a financial centre and will help the retail sector by making shopping more convenient for visitors from the mainland.

In a trial run starting later this year or early next year, Hong Kong banks will be allowed to take yuan-denominated deposits, provide yuan-based credit card services, exchange yuan for Hong Kong dollars and vice versa, and make remittances to the mainland in yuan.

Chan Kay-cheung, executive director of the East Asia Bank, said many Hong Kong banks are well-prepared. "We will start the yuan business as soon as the clearing bank is designated and starts working,'' he said on the sidelines of the signing ceremony. Officials said the clearing bank -- which will be responsible for channeling renminbi back to the mainland -- will be designated in the next few months.

Zhou Xiaochuan, governor of the central People's Bank of China, and Joseph Yam, chief executive of Hong Kong's de factor central bank, the Monetary Authority, signed the memorandum of understanding yesterday.

Zhou said the move's influence on the renminibi's exchange rate will be insignificant.

"When you take into account the huge size of the renminbi monetary system, the influence will be relatively small,'' he told reporters after the signing ceremony.

China's broad money supply, which cover cash and an array of deposits, stands at about 20 trillion yuan (US$2.4 trillion).

No official estimate on the volume of renminbi circulating in Hong Kong was announced. But experts estimate it to be around 80 billion yuan (US$7.2 billion).

"I believe this event will have no impact to the basically stable exchange rate of renminbi,'' Zhou said.

The move will not have any impact on mainland banks as the Hong Kong banks' authorized business scope does not include providing renminbi loans and interbank lending. But that is likely to be the next step in China's experiment in allowing more overseas competition in China's banking sector, which is to be fully opened to foreign participation at the end of 2006, in accordance with the country's World Trade Organization entry commitments.

Xu Hongyuan, a senior economist with the State Information Centre, said the profits from Hong Kong banks' engagement in renminbi business may not be big, but they shall be keeping an interested eye on the lending business.

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