The expansion of RMB business in Hong Kong under the Closer Economic Partnership Arrangement (CEPA III) is in line with the approach of the nation's policy of gradually liberalizing the convertibility of the currency and capital account, said Joseph Yam.

The Chief of Hong Kong Monetary Authority (HKMA) made the remark yesterday that the further liberalization of RMB business represents a small but progressive step in a gradual process towards the strategic goal.

Despite some setbacks in the limited scope of the expansion in the local banking industry, Yam stressed that Hong Kong must also appreciate the risks that too rapid financial liberalization might pose to the stability of the financial system on the Chinese mainland.

"Expansion in RMB business in Hong Kong will no doubt contribute to economic integration between Hong Kong and the Chinese mainland and strengthen Hong Kong's position as an international financial centre," Yam said in a statement. "It would also have implications for the convertibility of the RMB and capital account management on the Chinese mainland."

The central government has given in-principle approval to extend the scope of RMB business in Hong Kong, which raises the exchange limit between RMB and Hong Kong dollar per person per transaction and lifts the credit limit of RMB cards issued by banks in Hong Kong and allows Hong Kong residents to issue RMB cheques for a limited amount exclusively for consumer spending within Guangdong Province.

The market is expecting that the upper limit of RMB deposit amount offered by lenders in Hong Kong would be raised from 20,000 yuan to 50,000 yuan. Local lenders are also expected to be given the green light on providing RMB deposit service to commercial customers, and the central government will announce the details at a later stage.

Being able to conduct RMB business is crucial to maintain Hong Kong's status as an international financial centre, said Yam.

"One important pre-requisite for Hong Kong to play this important role is that the financial system of Hong Kong must be able to handle transactions in RMB, the currency of domestic savings and fund-raising on the Chinese mainland," Yam stressed.

HKMA said it would continue to talk with the central government about further expanding the scope of RMB business in Hong Kong, including the provision of banking services to allow cross-border trade to be settled in RMB, issuance of RMB-denominated bonds in Hong Kong.

Editor: Yan