China launches trial of cross-border RMB loan scheme

China on Monday launched a trial of its cross-border yuan lending program for the very first time. The program is set up in an area near Hong Kong - Qianhai - and is expected to boost the yuan's internationalization. It will allow several Hong Kong-based banks, such as Bank of China and HSBC, to lend loans to mainland firms.

The same day as the announcement, the Hong Kong Monetary Authority released its latest data of RMB deposits. By the end of 2012, the figure reached more than 700 billion yuan, or 113 billion U.S. dollars.

This makes Hong Kong the largest yuan offshore market in the world. But that would mean nothing for China if the money cannot circulate back into the financial system.

Deputy Dean of School of Finance at the Renmin University of China, Zhao Xijun, said, "There are many ways for the RMB to flow out and the accumulation overseas is high. But there are less ways for this money to flow back and be used in the mainland. We used to only have one official institution to handle the backflows, the Shenzhen branch of the PBOC. Apart from that, the money could only flow back illegally through private banks."

Before this initiative, China had already implemented measures to allow yuan in Hong Kong to be invested in mainland equity and security markets, such as RQFII. Now a new way has opened up for Hong Kong investors.

Zhao Xijun said, "The launch enriched official ways for the yuan to flow back, and could restrain the private ways. It could also benefit the opening of capital accounts."

Analysts say if China has more options for the currency to flow back into its market, then it would also be helpful for the central bank's monetary policy management. The trial program is also seen as a move to further liberalize interest rates in the country and make them more money-market focused.