HONG KONG: The city still awaits the critical step that could make it the financial center of China and Asia, local economists said yesterday. That critical step is the linkage of the Hong Kong dollar to the Chinese yuan.

Speaking at a seminar of the Hong Kong General Chamber of Commerce yesterday, Enoch Fung, economist and executive director of Goldman Sachs's Asia Economic Research Team, said a transition pegging the Hong Kong dollar to renminbi will be natural, if the circulation of yuan in the territory rises. That must await the gradual opening up of the capital account on the mainland, he observed.

"However, the path toward the peg is now at a very early stage," Fung said. Since the yuan is currently not convertible, while the economies of Hong Kong and the mainland are at different stages of the economic cycle, the peg hardly could be accomplished in near term, Fung said.

He added that both Hong Kong and the mainland, in the longer term, need to have more capital exchanges and more similar economic cycles, before thinking about the peg.

Frank Song, director of the Centre for China Financial Research at the School of Economics and Finance at the University of Hong Kong, said the territory is now acting as a testing-ground for the internationalization of renminbi.

"Yuan trading settlement and clearing center is the first step. Other concurrent steps are yuan deposits and bond issues through the Hong Kong bond market," Song said. "That eventually leads to trade finance, which will help build Hong Kong into an important renminbi off-shore center."

As Shanghai also is starting its test of yuan trading, settlement and clearing, Song pointed out that Hong Kong now faces an aggressive competitor.

"Shanghai has already been the number one in renminbi trading business," Song said, "It is also a major domestic renminbi financial center of stock and bond market, as well as banking and trading."

However, as Hong Kong has already opened its financial market to the rest of the world, Shanghai may need some time to catch up, he added.

Song also said the global financial crisis reveals the weakness of the US dollar based monetary system in the world. The yuan, he noted, is a likely candidate for a more diversified "basket of currencies" in the global system.

"10 years later, renminbi may account for 50 to 60 percent of the international foreign reserve," Song said.

Yang Jiewen, senior strategic planner at the Economics and Strategic Planning Department of Bank of China (Hong Kong), said renminbi can be developed into an international reserve currency, provided the mainland economy grows stronger with sizable international trade volume, while the yuan capital market should also be complete with deep liquidity.

(HK Edition 04/07/2009 page16)