Hong Kong is likely to be the second Chinese city that allows a fully convertible yuan, a move closer to its goal of becoming an offshore renminbi trading centre, said a veteran banker.
David Li, chairman and chief executive of Bank of East Asia, said yesterday he believed Hong Kong would be picked up as a test ground for a freely converted yuan, following North China's Tianjin.
"I believe that Hong Kong will follow Tianjin to become China's second city to be able to convert yuan freely," Li said.
"The day should come three to six months after yuan-converting trial is conducted in Tianjin," he said.
Tianjin has got the green light last month to convert the yuan freely in its Binhai Economic Area on a trial basis. It has been widely regarded as the mainland's another step to ultimately make its currency fully convertible.
"If (the trials in) Tianjin and Hong Kong are successful, other major cities in China such as Beijing and Shanghai will then follow suit in the near future," Li said, without giving any further details.
It is, however, unknown when Tianjin would formally launch the yuan test.
But overseas banks such as HSBC and Shinhan Bank have already set foot on Binhai Economic Area.
As many as 43 foreign financial institutions and banks including BNP Paribas have expressed their strong interest in entering into the area.
The mainland reformed its foreign exchange scheme by scrapping decade-long peg system on July 21, 2005. It allowed the yuan, which some economists said was undervalued, to appreciate by 2 per cent and link it to a basket of currencies and widen its daily trading band. After that, the yuan gained an accumulative 1 per cent.
Opening of banking sector
Li said that the mainland's fully opening its banking sector to overseas banks by the end of this year would offer not only huge market to develop but also huge challenge to cope with.
"For example, most banks on the Chinese mainland have very strong networks, which we can not catch up in a short term... To meet the challenge we must use our advanced and excellent products and services to attract potential clients."
The Bank of East Asia now has branches and representative offices in 18 mainland cities.
Overseas banks are expected to increase their presence on the mainland and will occupy 30 per cent of the banking market by the end of 2011, according to a CITIC Ka Wah Bank report released last month.
So far over 25 overseas investors have made strategic investment in 21 local banks with a total investment amounting to US$20 billion. Overseas banks to date own about 19 per cent market share on the mainland's banking market.