VZCZCXRO6583
PP RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #1280/01 1950838
ZNR UUUUU ZZH
P 140838Z JUL 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 8073
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS PRIORITY
RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 HONG KONG 001280 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM, EB/IFD/OMA, STATE PASS USTR FOR ALTBACH 
AND STRATFORD, TREASURY FOR OASIA AND CUSHMAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN HK CH ETRD
SUBJECT: RMB TRADE SETTLEMENT TAKES OFF IN HONG KONG 
 
REF: A. HONG KONG 1104 
     ¶B. HONG KONG 708 
     ¶C. HONG KONG 559 
 
¶1.  (SBU) Summary: Several Mainland companies have announced 
renminbi (RMB) trade settlement transactions with partners in 
Hong Kong in the wake of the July 6 People,s Bank of China 
(PBOC) authorizing announcement.  Hong Kong Monetary 
Authority (HKMA) Chief Executive Joseph Yam told the Consul 
General that HKMA has been lobbying for this for many years. 
HKMA will allow any Hong Kong bank with a correspondent 
relationship in the Mainland to conduct trade settlement in 
RMB.   Senior HKMA staff attended launching ceremonies in 
Shenzhen, Shanghai and Guangzhou on July 6 and 7, but were 
unable to provide details either about Mainland enterprises 
approved to participate in this pilot program or about any 
transactions.  Bank of China Hong Kong (BOC HK), Bank of 
Communications (BoCom), ICBC Asia and China Merchant Bank 
have reportedly completed one or more transactions, although 
for small amounts.  A potentially large benefit for Hong Kong 
banks is their authorization to issue RMB trade finance, 
although at this time the terms are reportedly limited.  HKMA 
officials say the PBOC is scrutinizing each transaction to 
avoid "over-invoicing" or other illicit trade-related 
transfer schemes.  End summary. 
 
========================================= 
RMB Trade Settlement Quick Out of the Box 
========================================= 
 
¶2.  (U) On the heels of the July 6 PBOC announcement 
authorizing RMB trade settlement transactions between 
selected Chinese entities and partners in Hong Kong, several 
companies were quick to put the new system to the test.  BOC 
HK claimed it had booked seven RMB trade settlement 
transactions on July 6, including the first between Shanghai 
Electric Hong Kong Company, Ltd., and Shanghai Electric 
International Economic and Trading Company, Ltd., for an 
unspecified amount to settle the purchase of electrical 
equipment from the Shanghai-based company.  BoCom claimed 
four transactions the first day, ICBC Asia one, and China 
Merchants Bank one.  (Note: Although details on the 
transaction amounts remain unclear, the numbers appear to be 
relatively small: press reports suggest transactions thus far 
total between RMB 20-30 million (US$ 3 to 4.5 million).  End 
Note.) 
 
¶3. (SBU)  The Chinese State Council first announced its 
intention to authorize limited RMB trade settlement in March 
¶2009.  HKMA External Head LI Cui said Chinese and Hong Kong 
enterprises have been expecting the announcement of the pilot 
program for some time and have, with their counterparts, been 
preparing to utilize the new system.  The rapid pace of 
transactions over the first few days reflects their eagerness 
and preparation, rather than pressure from Mainland 
authorities to conduct "show" transactions.  HKMA has also 
been preparing for this for some time and already has the 
necessary infrastructure in place.  Once PBOC gave their 
approval to begin the pilot, it was very easy to conduct 
these transactions, said Li. 
 
============================== 
But the Details Remain Unclear 
============================== 
 
¶4. (SBU) HKMA officials confirmed that the Chinese 
authorities have a list of entities in Shanghai, Guangzhou, 
Shenzhen, Dongguan, and Zhuhai that are authorized to conduct 
RMB settlement transactions, but HKMA has not seen the list. 
External Department Head LI Cui recounted hearing Guangzhou 
officials at a July 7 launching ceremony state that 300 
Guangdong companies had already been approved, but noted that 
this list is designed to guide mainland Chinese banks. She 
surmised that the authorized firms are the larger, more 
reputable trading companies and offered that the local 
governments are in charge of approving entities to 
participate in the pilot scheme.  HKMA CE Joseph Yam told the 
Consul General in a separate conversation that the HKMA 
welcomes all RMB transactions and will not restrict Hong Kong 
companies interested in settling trade accounts in RMB. 
 
============================== 
HKMA Encourages/Warns HK Banks 
============================== 
 
¶5.  (SBU) HKMA met with Hong Kong banks just after the PBOC 
 
HONG KONG 00001280  002 OF 002 
 
 
announcement to remind banks that this is a pilot program, 
that the RMB remains an unconvertible currency and that they 
must continue to exercise appropriate prudential safeguards. 
They also reminded banks that the PBOC is concerned about 
"genuineness" and warned against conducting transactions that 
are not fully supported by actual trade.  HKMA officials 
expect that even trade between subsidiaries will be subject 
to several layers of scrutiny to avoid transfer pricing. 
 
¶6.  (SBU) Li noted that Hong Kong banks authorization to 
extend RMB trade finance is an important benefit and will 
enhance Hong Kong,s role as an international financial 
center.  Banks can offer letters of credit for the full 
transaction, although LCs are limited to no more than 90 
days.  Banks are not subject to transaction limits but remain 
subject to HKMA oversight and capital requirements, including 
holding sufficient RMB reserves. 
 
¶7. (SBU) The PBOC and HKMA signed a RMB 200 billion (US$ 29 
billion) swap agreement on January 20, 2009.  Li confirmed 
that these RMB funds could be drawn on if local demand for 
RMB exceeded Hong Kong,s current supply of just over RMB 50 
billion (US$ 7.35 billion).  HKMA is still considering how to 
operationalize these funds, said Li, but plans should be in 
place in the near future.  Given the small size of current 
transactions, there is no need to access the swap line at 
this time, but the HKMA will be ready when demand increases, 
she said. 
 
====================================== 
Potential Users Limited, but Will Grow 
====================================== 
 
¶8.  (SBU) When asked who would be most likely to use the RMB 
trade settlement mechanism, Li acknowledged that importers 
from Western countries would be unlikely to want to 
denominate their transactions in RMB, particularly if they 
believe RMB appreciation is imminent.  But many Chinese 
importers will be eager to use this mechanism, especially 
commodity importers that have some pricing power.  Entities 
seeking to facilitate intercompany transfers, such as the 
Shanghai Electric transaction, may also be interested to use 
the new facility.  While users currently need to conduct 
business through Hong Kong to access the RMB trade settlement 
scheme, planned expansion to ASEAN countries will likely lead 
to a surge of additional cross-border trade denominated in 
RMB, said Li. 
DONOVAN