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UPDATE 1-Hong Kong to loosen yuan conversion limits in further FX reform
July 25, 2012 / 11:18 AM / 5 years ago

UPDATE 1-Hong Kong to loosen yuan conversion limits in further FX reform

* Non-residents allowed unlimited yuan conversion

* Move seen positive for offshore yuan mkt, to bolster liquidity

* 20,000 yuan daily conversion limit for HK residents to remain

* Seen as further step toward full yuan conversion by Beijing (Adds details and analyst comment)

By Michelle Chen

HONG KONG, July 25 (Reuters) - Hong Kong said on Wednesday it will allow non-residents to convert unlimited daily amounts of yuan in a move seen as positive for the offshore market and a step by Beijing toward full convertibility of the tightly controlled currency.

A more generous yuan conversion quota in Hong Kong, the world’s largest offshore yuan centre, signals that China is accelerating efforts to open up its tightly managed capital account.

Hong Kong residents can open yuan accounts and buy up to 20,000 yuan ($3,100) per day, to invest in a range of assets, but non-residents have not been allowed to do so.

The Hong Kong Monetary Authority (HKMA) said authorised institutions would be allowed to offer yuan services to personal customers who are non-Hong Kong residents from Aug. 1.

The yuan funds for non-resident conversion would draw primarily from Hong Kong’s more than 7 trillion Hong Kong dollar ($902.4 billion) pool of deposits, of which around half are foreign currency deposits including 554 billion yuan.

Some analysts say the move is aimed at boosting the pool of offshore yuan liquidity which has declined in the past five out of six months in the former British colony. The yuan’s slower appreciation against the dollar recently has hurt investor appetite for assets denominated in yuan.

“Indirectly, from the policy maker’s point of view, supporting third party to use Hong Kong as a venue for renminbi activities and settlements, means Beijing is unlikely to base additional renminbi clearing banks overseas in the near term,” said Nathan Chow, an economist with DBS.

“That means Hong Kong’s unique role still remains.”

Hong Kong banks have been lobbying China to relax rules on yuan investments as competition for offshore yuan business intensifies from other financial centres such as Singapore and London.

Carmen Chu, executive director (external) of HKMA, said improvements to the conversion quota for Hong Kong residents would depend on demand and future developments.

“The conversion quota at present seems to be able to satisfy Hong Kong residents’ needs.”

On trading opportunities, Eddie Yue, deputy chief executive of HKMA said the offshore and onshore exchange rates were quite close to each other now and the cost of arbitrage trades may be high. He believed the two rates would move even closer when the market enters a more mature stage.

At the same time, the Hong Kong Monetary Authority stressed what many have called an overly restrictive 20,000 yuan daily conversion limit for residents, will remain in place.

“The use of the Shanghai conversion window and cross-border remittance transactions to or from the mainland for Hong Kong residents under the Clearing Agreement will not be offered to non-residents,” the HKMA said in a statement.

Analysts said this could stem from difficulties in obtaining cumbersome regulatory and legislative approval within China, to allow a greater flow of cross border yuan funds to Hong Kong from the CNY platform in Shanghai.

The Hong Kong Association of Banks and the regulatory authorities have held discussions on increasing yuan daily conversion quotas since the beginning of this year.

In recent weeks Beijing has also sanctioned the opening of a new special economic zone called Qianhai in southern China’s boomtown of Shenzhen and removed barriers to free up cross-border yuan flows.

The HKMA has also pushed back the time by which authorised institutions involved in yuan business can submit requests for yuan funds to China’s central bank to 1330 from 1000, in another incremental step to bolster offshore yuan market flexibility.

($1 = 6.3858 Chinese yuan)

$1 = 7.7575 Hong Kong dollars Additional reporting by Tian Chen and James Pomfret; Editing by Jacqueline Wong

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