The further expansion and liberalisation of the Renminbi trade settlement pilot scheme, together with the recent signing of the revised Settlement Agreement on the Clearing of Renminbi Business in Hong Kong are seen by most foreign investors as an important and very positive step in China's internationalisation of its currency. In particular, it is expected that these developments will result in a significant increase of Renminbi reserves in Hong Kong. This will stimulate the development of new Renminbi-denominated investment options which will help Hong Kong establish its position as an active Renminbi offshore centre.

However, the key issue which will affect the motivation of foreign investors to accept the Renminbi as a clearing currency and to invest in RMB products is whether and when such foreign-held Renminbi will be allowed to be used freely in the capital markets of China, given the Renminbi is not an internationally convertible currency. Foreign investors will wish to be provided with more channels through which they can make use of this currency. Regulatory obstacles are currently self-evident as the capital market of China is, generally speaking, closed to foreign-held Renminbi.

The recent lifting of the restrictions on the opening and transfer between Hong Kong authorised institutions of Renminbi deposit accounts will promote the liquidity of Renminbi in Hong Kong and also make Renminbi-related inter-bank business feasible. It is reported that CITIC Bank International and the Industrial and Commercial Bank of China have just completed the first swap of Hong Kong dollars for Renminbi. It is unlikely to be very long before we see various RMB-denominated financial products appearing on the market, including insurance, securities, fund products and other financial derivatives. HSBC has launched its new Renminbi-denominated currency-linked structured deposits in Hong Kong and BOCG Life has also launched several Renminbi-denominated insurance products.

From a foreign investor's point of view, these developments will provide more opportunities to receive revenue in Renminbi and take advantage of its widely-predicted potential for appreciation.

However, as mentioned above, it remains uncertain to what extent and when China will open its capital markets to such foreign-kept Renminbi deposits. Being an offshore Renminbi centre, Hong Kong may provide some investment opportunities, but the development of such Renminbi-related business will be limited if not ultimately channelled/connected to the China market. Chinese authorities are considering various options in this respect and the introduction of a "mini-QFII" scheme (where certain qualified Renminbi funds deposited in the Hong Kong market may be allowed to be invested into the A share market of China) is now a hot topic. A chief official of the Shanghai Financial Service Office has also mentioned that Shanghai intends to channel the Renminbi funds deposited with the banks in Shanghai to the inter-bank market of China. We expect that China will open the "door" gradually and very carefully in order to mitigate any possible negative impact to China's economy.

Uncertainty always goes with risks. Whether or not and to what extent foreign investors may participate in the process of Renminbi's internationalisation depends on their confidence in the economy of China and its global influence.

Recent news reports anticipate an increase in "intermediary activities denominated in the Renminbi". We understand that the "intermediary activities denominated in the Renminbi" include financial products provided by banks, insurance products, securities and fund products.

The industry that would enjoy immediate benefit from these developments would be the banks in Hong Kong. Apart from usual banking services, the banks may develop various Renminbi-denominated financial products, which would have huge market potential. Some banks have been quick to launch such new products.

Whether or not there will be widespread development of Renminbi-denominated securities or fund products in Hong Kong will depend on whether the "channels" for bringing the Renminbi funds to China (for any purpose other than trade) will be put in place. The "mini-QFII" scheme is currently under discussion. However, it is probably sensible not to have high expectations on its effects on the market, as the quota of the permitted flow of funds into China under such scheme would initially be very limited. The same issues will apply to the development of related insurance business.

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