"As the market no longer sees a straight-line appreciation for the yuan, a lot of Hong Kong exporters receiving yuan as payments are starting to use options to manage their yuan exposure, " said Candy Ho, head of yuan business development in the Asia-Pacific region for HSBC Holdings PLC.
Anyone with a Hong Kong yuan account is now able to trade the currency.
On the one hand, that could slow down the buildup of yuan in Hong Kong's banking system as more of the currency exits the territory to pay for Chinese goods.
WSJ: The View From Hong Kong: Walking a Fine Line on Yuan Trade
The inquiry was sparked when yuan remitted into Hong Kong for trade settlement in October more than doubled from the previous month, boosting yuan on deposit in the city's banks by 45%.
WSJ: The View From Hong Kong: Walking a Fine Line on Yuan Trade
Reduced expectations for appreciation have also contributed to a slowdown in the growth of yuan deposits in Hong Kong the only place where the currency can trade freely and have cut demand for yuan-denominated bonds sold in the territory, dubbed "dim sum" bonds.
One upshot is that growing mountain of yuan deposits in Hong Kong - because all this wonderful trade in renminbi is essentially one way.
The loosening of restrictions on trading yuan started in Hong Kong, a former British colony under Chinese sovereignty but with its own legal and financial systems.
The U.K. accounted for 30% of global yuan payments outside Hong Kong in the fourth quarter of 2011, up from 22.1% in 2011's first quarter, Swift said.
Except, that rapid growth is actually one of the unintended consequences of the authorities' decision to let Chinese regions conduct trade with Hong Kong in yuan, which is causing growing headaches for the authorities.
Other moves include setting up a yuan trading hub in Hong Kong and a loosening of some limits involving the bond market.
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Asked how important the offshore yuan business is to Hong Kong's future, Mr. Chan asks us to imagine if Manhattan could only trade international currencies, and the currency of Manhattan, but not the currency used in the rest of the U.S., its natural hinterland.
WSJ: The View From Hong Kong: Walking a Fine Line on Yuan Trade
Soon afterwards HSBC, a global bank, issued the first yuan bond outside China or Hong Kong.
This does not mean that either the Hong Kong dollar or the yuan are out of the woods.
China has taken some baby steps in this direction, for instance by allowing firms to issue yuan-denominated bonds in Hong Kong.
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If the Chinese government devalued the yuan, the consequences for Hong Kong would be severe, calling into question China's commitment to the Hong Kong dollar peg.
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Eventually the strategy of using Hong Kong to internationalize the yuan will pay off and lay the base for the ultimate maneuver of making the yuan fully convertible in Japan.
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Orthodox thinking regarding yuan internationalization (the yuan is the base unit of the renminbi) revolves around the idea that if it is to occur, the yuan will become globalized through Hong Kong-based transactions.
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Those that are fixed by governments notably the Hong Kong dollar and the Chinese yuan have simply drawn greater speculation about the effect of future speculation.
He is also apparently planning to list real estate assets this year in what could be the first yuan-denominated public offering in Hong Kong.
Under the rules of the fund, institutional and individual investors raising capital in the Chinese currency, the yuan, from offshore markets like Hong Kong will be able to make direct investments in China.
Mr. Chan predicted that the next phase of offshore yuan trade would involve "more balanced flow between the mainland and Hong Kong, " with Chinese currency moving in both directions as more Chinese exporters ask to accept yuan in payment for their goods from overseas buyers.
WSJ: The View From Hong Kong: Walking a Fine Line on Yuan Trade
This is the first time that the yuan has traded outside of China and Hong Kong.
Yuan has accumulated in ever larger amounts in Hong Kong's banking system.
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There are two major steps the PRC government can take that would advance yuan internationalization beyond anything it has achieved via Hong Kong.
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Look for ETFs that own stocks traded in Shanghai, Hong Kong and Mexico City, since the yuan, the HK dollar and the peso have been relatively steady against the dollar.
And while Hong Kong, China banks are happy to extend yuan loans, they are not welcome by borrowers.
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Hong Kong also is extending the operating hours of its yuan payments systems, making it easier for yuan transactions to be settled in London.
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