The central government yesterday gave the approval for mainland lenders to issue renminbi bonds in Hong Kong, marking a breakthrough in its currency polices and paving the way for a fully-convertible yuan.

The mainland has thus opened up the capital account in an overseas center for the first time after it did so on the current account a few years ago.

The capital account tracks the movement of funds for investments and loans in an economy, while the current account tracks flows of transactions such as in goods, services and interest payments.

At a press conference, Hong Kong Financial Secretary Henry Tang said the special administrative region (SAR) would discuss details next week with the People's Bank of China, the mainland's central bank.

The central government is also studying whether to allow the use of the yuan to settle payments for mainland exports to Hong Kong, he said, adding no timetable has been set.

Hong Kong Chief Executive Donald Tsang welcomed the move. "This new category of renminbi business is conducive to business opportunities for banks and enhancing financial flows between Hong Kong and the mainland," he said.

Local economists forecast more openings and a greater role for Hong Kong in the reform of the country's foreign exchange regime.

"The RMB bond issue is a significant opening of yuan-denominated services," said Frances Cheung, an economist with Standard Chartered Bank. "We foresee more openings in the future."

Some even predict the central government may soon allow the yuan to be fully convertible in the city on a pilot basis.

Hong Kong is seen as a test ground for the mainland to exercise greater flexibility in its foreign exchange regime and offshore yuan businesses. The SAR has become a proxy for foreign investors to bet on yuan appreciation.

Four types of yuan businesses deposit, withdrawal, exchange and remittance have been allowed in the SAR from February 2004. By November, a total of 22.6 billion yuan ($2.89 billion) was held by 40 Hong Kong banks as deposit.

The deregulation will definitely benefit mainland banks, which offers them a new fund-raising channel apart from listing and retail banking, economists said.

Three policy banks China Development Bank, The Import-Export Bank of China and Agricultural Development Bank of China could be the first batch of financial houses to be allowed to conduct the business, said an analyst who declined to be named. "Mainland commercial banks have various ways to tap Hong Kong's equity market," he told China Daily. "It is policy banks that urgently need fund-raising channels," he added.

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