INVESTIGATION AND RESEARCH OF CONDITIONED CONVERTIBILITY OF RMB DEPOSIT IN HONG KONG

The demand for RMB in Hong Kong is far greater than supply. Currently there are several money exchanges and banks engaged in RMB and Hong Kong dollar conversion. Since the exchanges charge no commission, quote better than the banks and have no limit on the converting amount, the conversion between RMB and Hong Kong dollar therefore goes mainly through the exchanges. Even the banks have to resort to the exchanges for balance of position.

For the convenience of supervision on RMB circulation in Hong Kong and prevention of trafficking and money laundering, it is suggested that RMB circulating in Hong Kong be brought into the regular banking system. The following are some specific measures.

* Allowing banks in Hong Kong to operate RMB cash deposit. This business is similar to RMB deposit on the mainland; only that it allows conversion of RMB to Hong Kong dollar or foreign currency within a certain quota for withdrawal.

* Establishing conditioned RMB exchange accounts, i.e. depositors can convert Hong Kong dollars or foreign currency to RMB for depositing, or convert back for withdrawal.

* Establishing a sound RMB clearing system. All the banks operating RMB deposit business in Hong Kong shall open RMB deposit accounts with the designated RMB clearing banks and deposit the assimilated RMB funds with the designated banks. The RMB clearing banks in Hong Kong shall open accounts with the RMB clearing banks on the mainland. RMB long or short positions held by Hong Kong banks shall be balanced with the designated clearing banks.

* Gradually realizing RMB convertibility on trade account and current payment.

RMB deposit legalization and conditioned convertibility would face risks in two aspects.

* One is that the possible interest rate gap may result in large amounts of RMB outflow, for deposit rate in Hong Kong is defined by each bank without government intervention. The possible solutions are: 1. Banks in Hong Kong shall be forbidden to use RMB deposit in providing loan or investing on mainland. 2. Banks in Hong Kong should not transfer RMB capital with its branches on the mainland.

* The other one is arbitrage due to the exchange rate gap. Possible measures for this include: 1. Financial authority shall strictly supervise RMB circulation in Hong Kong and exchange rate trend for timely adjustment. 2. It should be regulated that banks in Hong Kong shall only accept RMB deposit of private individuals. 3. Limit should be exerted on the exchange volume of RMB cash accounts; suggested volume is the equivalent of maximum RMB 20,000 yuan, etc.(by Chen Ganxin, Reserve Management Dept., SAFE)