HONG KONG -- Companies in Hong Kong will be allowed to use the yuan to settle trades with their counterparts in five major Chinese cities as soon as next month, monetary authorities in mainland China and Hong Kong said.
The pact with Hong Kong to use the yuan as a settlement currency for trade is the latest step toward Beijing's long-term aim of internationalizing the Chinese currency. At present, the yuan isn't fully convertible under the capital account.
The agreement, which had been expected, will also allow Hong Kong banks to carry out more yuan business, a potential benefit to their earnings.
The pact, signed by the People's Bank of China and the Hong Kong Monetary Authority on Monday, will allow Hong Kong firms to settle trades in yuan with companies in Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai.
Zhou Xiaochuan, the governor of the People's Bank of China, said at a news conference in Hong Kong that the new arrangement "will effectively reduce risks in foreign-exchange rates and costs in translating foreign currencies while making payment," reducing overall trading costs.
Joseph Yam, chief executive of the Hong Kong Monetary Authority, said the agreement will also "facilitate an orderly flow of yuan between Hong Kong and China.
The agreement marks "a significant milestone for Hong Kong," HSBC economist George Leung said, "as it will be the first time the yuan is involved in business activities in the city."
Hong Kong, a former British territory, uses its own currency, which is pegged to the U.S. dollar and freely convertible. Since February 2004, though, Hong Kong banks have been allowed to offer exchange, remittance, credit-card and deposit-taking services in yuan, within strict limits.
Still, the immediate impact is likely to be marginal. Even Mr. Zhou admitted Monday that, for businesses in Hong Kong, the advantages of settling trade deals in yuan "aren't very huge."
Leo Wah, a senior analyst at Moody's Investors Service, said "it may take at least a few years" before income from yuan services has a material impact on Hong Kong's banks.
Mr. Zhou also said China's economy could hit or exceed the government's 8% growth target this year, sounding a note of optimism as a tentative recovery appears to be taking hold on the mainland.
"Based on the current situation, China's economy in the third and fourth quarters will very likely continue to improve, making it likely China's economic growth will reach what it has targeted for this year," Mr. Zhou said.
China's gross domestic product grew 6.1% in the first quarter compared with a year earlier, slowing from the 6.8% expansion in the fourth quarter of last year. But senior Chinese policymakers have indicated that the worst of the downturn may be over, though many, including the State Council, still caution that the foundations of the recovery aren't yet firm.
China is due to issue its second-quarter GDP data in mid-July. Economic indicators, such as fixed-asset investment, manufacturing activity and industrial output, have shown sequential improvements during the first five months of the year, despite continued downward pressure on prices and overcapacity in some sectors.
