China's central bank has given foreign lenders the green light to offer trade finance to local firms settling cross- border deals in yuan. It also promised tax breaks under its pilot scheme.A memorandum signed on Monday by the central bank chiefs of the mainland and Hong Kong paved the way for the scheme.
Foreign banks settling import and export deals in yuan in Hong Kong and Macau may buy the Chinese currency from mainland banks within certain limits, according to rules issued yesterday by the People's Bank of China.
The rules make clear that authorities will ensure banks and companies do not try to use the pilot program to evade China's capital controls. Yuan loans must be backed by trade documentation.
"Domestic settlement banks should take effective measures to know the nature and purpose of their clients' trading," the PBOC said.
Exporters may keep their yuan earnings outside China, according to the rules, effective from Wednesday.
Mainland banks will be allowed gradually to extend trade finance in yuan to overseas firms, the PBOC said.
Woody Chan Kang-muk, executive vice president and treasurer at CITIC Ka Wah Bank, expects cross-border trade financing to increase 5 percent after the implementation. He also expects a mainland bank to be the first to kick off yuan trade settlement within this month.
The Hong Kong Monetary Authority welcomed the PBOC's announcement.
"This signifies that the implementation work is near completion, and the scheme is expected to begin operation shortly," an HKMA spokesman said. "The PBOC is finalizing the clearing agreement with the clearing bank."
Details about the scope of services provided by Hong Kong banks will be finalized accordingly, the HKMA added.
Mainland export firms involved in the trial will continue to qualify for export tax refunds. Usually, firms need to provide documents showing they are being paid in dollars in order to get tax rebates.
