An offshore renminbi deposit centre could in one stroke assure Hong Kong's position as the mainland's premier capital market.

The idea of allowing Hong Kong banks to accept renminbi deposits was mooted more than a year ago in Beijing and Hong Kong. Proponents include Dai Xianglong, the former governor of the People's Bank of China, and Joseph Yam, chief executive of the Monetary Authority of Hong Kong, the de facto central bank.

Banking authorities both in Beijing and Hong Kong at that time apparently proposed the idea as a need to properly channel the flow of an estimated 50 billion yuan (US$6.25 billion) cash to Hong Kong into the banking system.

In an essay published in March 2002, Yam wrote that one way of monitoring such flows was to entice them, through the payment of interest and the provision of banking services, into a system - the banking system - where proper records are kept. "For the time being, we aim to tackle the flow of renminbi cash (into Hong Kong) through enticing it into the banking system," he wrote.

The topic was raised again last Friday by Chief Executive Tung Chee-hwa, who said that the mainland authorities would consider allowing Hong Kong banks to conduct renminbi business for individuals on a trial basis, including deposits, remittances, exchange and credit-card business. Since then, some of Hong Kong's leading bankers have voiced their strong support and envisaged the benefits to Hong Kong as a banking centre.

Richard Or, general manager of HSBC, said banks would love the renminbi business as the currency was the second most popular currency in Hong Kong. Since the renminbi is now under great pressure of appreciation and the currency exchange rate is much higher than the Hong Kong dollar, it will mean that more people will prefer to save the yuan currency - bringing a great demand on personal savings accounts, he said.

Vincent Cheng, vice chairman and chief executive of Hang Seng Bank, also welcomed the mainland's approval for Hong Kong banks to run personal renminbi banking services. He said such a move showed the central government's support towards Hong Kong. He believed that it would be beneficial to the Hong Kong banking industry because renminbi had a high circulation in Hong Kong.

Cheng said he hoped that the proposal can be implemented before the end of this year and he agreed with Yam that bringing the renminbi into the Hong Kong banking system can provide the central government with more accurate information about the currency flow.

Tai Hui, an economist at Standard Chartered Bank, said: "It'd be good for Hong Kong if Hong Kong could become the offshore renminbi market. As the currency is now being recognized in many countries, many foreign companies might want to set up bank accounts with Hong Kong banks for renminbi transactions. More of them might want to set up offices here too as our legal and financial services are more outstanding than on the mainland."

Joe Lo, Greater China economist at Citibank, agreed with Tai that Hong Kong becoming a renminbi offshore market would bring in more opportunities for the banking industry in the territory. He said banks would enjoy extra earnings from the new business.

"The benefits to Hong Kong are not limited just within the territory if we can really lead the world to provide renminbi services," Lo said.

He said the number of mainland tourists travelling abroad is growing enormously and that renminbi flows faster into many other favourite destinations. Banks in those countries which have collected renminbi will send the currency to Hong Kong to exchange for their countries' own currencies. This will enable Hong Kong to exchange their own countries' currencies. In the process, Hong Kong banks will profit from the foreign-exchange transactions.

Earlier this week, Yam said that such an initiative would be of benefit both to Hong Kong's development as an international financial centre and to the growing economic integration between Hong Kong and the mainland.

"The fact that the central government is now giving active consideration to allowing trial operations in this area is very encouraging news," Yam said.

Since the proposal was still at a very preliminary stage, the exact details of the trial runs would need to be worked out once the decision to proceed had been taken, he added.

"We look forward to working with the mainland authorities and with the banks of Hong Kong on this project in due course," Yam said.

The further agreement of the central government to give preference to Hong Kong when considering liberalization in market access in respect of offshore renminbi business, which was also revealed by Tung today, was very good news for Hong Kong, he said.

"Obviously, this is a matter for consideration by the central government at a future date, when such liberalization becomes a reality," Yam said. "However, the agreement to give preference to Hong Kong is a very positive reinforcement of Hong Kong's status as an international financial centre."

A major issue that needs to be considered is the utilization of renminbi deposits collected by banks. As Yam noted there is no demand for renminbi bank loans for use in Hong Kong.

"The task at hand is therefore to create a channel whereby renminbi deposits, when taken, could be directed to where there is demand, in the form of bank loans, or in other forms of financial intermediation," he wrote in his essay. "This would be a formal channel that would enable the renminbi relationship between the banking systems of the mainland and Hong Kong to be established electronically."

Lo of Citibank said although Hong Kong banks did not have a lot of branches on the mainland, they could lend the renminbi they collected in Hong Kong to the interbank on the mainland. That way, they can earn a reasonable interest rate spread with minimum risks.

Another major concern is the possible large outflow of renminbi into Hong Kong. Bankers said that this could be prevented by setting a strict limit on the total amount of renminbi deposits at Hong Kong banks.

Others said that the high interest rate on the mainland would be sufficient to ensure that the flow is not going to be one way.

"Interest rates on the mainland are significantly higher than those in Hong Kong, I don't think there should be any worry of an uncontrollable flow of renminbi into the Hong Kong's banking system," Lo said.

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