Chinese Yuan Notes Pour Into HK, But Where Do They Go?
Monday October 13, 10:09 AM
HONG KONG (Dow Jones)--Another Golden Week holiday has come and gone, with nearly 300,000 mainland tourists visiting Hong Kong and spending by some estimates as much as 1.5 billion yuan ($1=CNY8.28).
Though the holiday break - which began with National Day on Oct. 1 to celebrate Mao Zedong's declaration of the People's Republic of China - is one of three weeklong periods each year designed to give China's workers time to travel and spend to boost the local economy, more and more of those travelers are choosing to visit and spend in Hong Kong. Each mainland tourist is permitted to carry as much as CNY6,000 out of the country, though economists estimate the average visitor spends only CNY4,000-CNY5,000 of that.
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That splurge is a boon to Hong Kong's jewelers and other retailers, but it is a headache for the People's Bank of China, the mainland's central bank. Many tourists change their yuan bank notes into Hong Kong dollars at any of the hundreds of moneychangers around the city, but others simply pay for their purchases with yuan. Because there is no authorized yuan-clearing bank in Hong Kong, the People's Bank and the local government have only the haziest idea of how much yuan there is in the city.
Estimates vary widely, and the only thing known for sure is that it must be an enormous amount of money. CLSA analyst Dominic Chan estimates that by year end there will be CNY65 billion in cash sitting in Hong Kong - or about half the notes and coins of Hong Kong money in circulation.
Economic growth in China and greater relaxation of travel restrictions will result in ever-increasing numbers of Chinese tourists visiting Hong Kong. On present trends, the amount of yuan in Hong Kong will jump to CNY97 billion, or 73% of Hong Kong's money supply, by the end of 2005, Chan says. One economist predicts there will be as much as CNY300 billion in Hong Kong by then.
The problem is that the yuan's official inconvertibility means there are no formal means of repatriating that yuan, and few efficient ways. Moneychangers have two main options: carry it over the border illicitly, or use an offsetting arrangement with a partner moneychanger in mainland China who sells yuan to visiting Hong Kong businessmen and tourists.
As Chan notes, there is no regulatory supervision of this essential industry.
"That's why there's a strong need for a clearing system, (although) the market will find a solution for you" in the meantime, says economist Steve Xu at ICBC Hong Kong.
The yuan is among the host of foreign currencies that Marks & Spencer's cash registers are programmed to accept, according to saleswoman Yvonne Wan. The venerable U.K. retailer generally uses the formal banking system, rather than moneychangers, to convert yuan notes back into Hong Kong dollars.
Banking giant HSBC Holdings PLC (HSBA.LN) accepts yuan bank notes, in large part because its HSBC USA Inc. banking operation is a large note-exchange bank, according to Hong Kong spokesman Gareth Hewett. The U.S. unit takes yuan bank notes from Hong Kong and exchanges them with other banks requiring yuan.
For its part, the Hong Kong government is eager for more yuan to enter the city, as a first step toward turning the city into a pioneering yuan offshore center and boosting its flagging status as a major financial center. But progress has been slow, and in recent comments Financial Secretary Henry Tang has seemed careful not to push too hard, too fast. Hong Kong has formally requested only that it be permitted to engage in four simple yuan services: exchange, deposit, remittance and credit-card business.
Still, official sanctioning of the yuan's de facto convertibility in Hong Kong has an air of inevitability.
"The amount of renminbi (yuan) circulating in Hong Kong will be growing double-digit for the next few years, so at one point you'll have a lot of renminbi in Hong Kong and a much greater spread of renminbi use in department stores," says Xu. "Then it will be in policy makers' interest to bring renminbi into the banking system. If renminbi are being brought into the banking system, it's going to improve policy makers' decision-making process."
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