VZCZCXRO1951
PP RUEHCN RUEHGH
DE RUEHHK #0266/01 0430703
ZNR UUUUU ZZH
P 120703Z FEB 10
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 9616
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 HONG KONG 000266 
 
SENSITIVE 
SIPDIS 
 
STATE FOR E, EAP/CM AND EEB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON HK CH
SUBJECT: HONG KONG PUSHES THE OFFSHORE RMB ENVELOPE 
 
REF: A. HONG KONG 212 
     ¶B. 09 HONG KONG 1667 
     ¶C. 09 HONG KONG 1280 
     ¶D. 09 HONG KONG 1104 
 
¶1.  Summary:  The Hong Kong Monetary Authority (HKMA) issued 
a circular February 11 that effectively simplifies and 
expands the use of Renminbi (RMB) in Hong Kong for both 
cross-border and domestic transactions.  Foreign companies, 
including U.S. companies, are explicitly allowed to conduct 
trade settlement for both goods and services trade, can 
borrow in RMB from authorized Hong Kong banks and even issue 
RMB bonds in Hong Kong.  Hong Kong banks will no longer need 
to verify the eligibility of Mainland counterparties to 
conduct cross-border transactions.  The volume of RMB 
transactions in Hong Kong grew dramatically in December and 
January; these "clarifications" should accelerate the use of 
RMB in Hong Kong even further.  End Summary. 
 
¶2.  (U) The HKMA's February 11 circular "clarified" the 
supervisory principles and operational arrangements for RMB 
business in Hong Kong.  While the HKMA was careful not to 
publicize these "clarifications" as expansions of the scope 
of RMB use in Hong Kong (going so far as to issue the notice 
under the "guidelines" rather than the "press announcements" 
section of its website), the practical effect will be to 
broaden the number of transactions where RMB can be used and 
simplify the use of RMB for banks in Hong Kong.  The HKMA 
circular allows any authorized financial institution in Hong 
Kong to open RMB deposit accounts for any corporate customers 
to conduct trade settlement transactions in Hong Kong.  This 
clarification allows foreign, including U.S., corporations 
with Hong Kong bank accounts to settle trade with approved 
Mainland counterparts in RMB.  They will also be allowed to 
use RMB checking and credit card services.  It also 
effectively expands the scope of RMB trade settlement in Hong 
Kong to include trade in services as well as goods. 
 
¶3.  (U) Authorized Hong Kong banks are also allowed to lend 
RMB to interested corporate customers.  These RMB loans will 
no longer be limited just to trade finance for specific 
transactions, but can also be used to fund approved projects 
in mainland China.  RMB bonds, previously limited to selected 
financial institutions, will now be an option for all Hong 
Kong corporates, subject to their eligibility under Hong 
Kong's normal bond issuance regulations.  However, they will 
not be allowed to directly remit the RMB funds raised back to 
China, nor to use the funds to invest in Chinese stocks, 
bonds, or property. 
 
========================================= 
Simplifying RMB Transactions for HK Banks 
========================================= 
 
¶4.  (SBU) Undersecretary for Financial Services and the 
Treasury Julia Leung previewed these moves for U.S. officials 
on January 27 (ref A).  In discussions February 12, she 
expected the most important aspect of the HKMA circular was 
the announcement that Mainland authorities and banks are 
responsible for verifying whether transactions are in 
compliance with Mainland regulations.  Previously, Hong Kong 
banks were required to verify whether Chinese counterparties 
were on a list of institutions authorized to conduct 
cross-border RMB transactions, a time consuming and often 
difficult process.  Any RMB transaction involving a Mainland 
counterparty can now be assumed to have approval from the 
relevant Chinese authorities, said Leung. 
 
============================== 
RMB Transactions Growing in HK 
============================== 
 
¶5.  (SBU) HKMA External Head Carmen Chu noted that the 
circular only clarified approved transactions under the 
existing framework and in some areas simply acknowledged 
transactions that were already taking place.  RMB services 
trade settlement had already been taking place in Guangdong 
province for several months, she said.  In other areas, the 
"clarifications" should allow for more rapid development of 
cross-border RMB transactions that have accelerated in recent 
months.  RMB trade settlement got off to a relatively modest 
start after its announcement in July 2009 (ref D) and had 
resulted in only about RMB 490 million (US$72 million) in 
transactions through the end of November.  However, December 
and January figures showed a sharp increase in cross-border 
RMB transactions to RMB 1.3 billion (US$191 million) in 
December alone, said Chu.  January figures have not yet been 
released, but Chu estimated based on available information 
that the January number would be even higher. 
 
HONG KONG 00000266  002 OF 002 
 
 
 
¶6.  (SBU) Both Chu and Leung noted press speculation that the 
Chinese Ministry of Finance was considering issuing another 
tranche of RMB-denominated bonds in Hong Kong, following on 
the oversubscribed launch of RMB 6 billion in sovereign bonds 
in September 2009.  While neither was willing to offer a 
prediction, both agreed that another Chinese RMB bond 
issuance would be a welcome boost for Hong Kong's developing 
debt market. 
MARUT