When to liberalize Chinese currency, Yuan or RMB?  How to make Yuan more  internationally influential?  Hong Kong is being used by Chinese government as their forefront currency experiment lab.  Reports WSJ:

A burst of activity is under way here in the city that might be called China’s in-house research-and-development center for currency liberalization.

It’s on a tiny scale by normal standards of the $3 trillion-a-day market for foreign exchange. But in Hong Kong, banks are for the first time starting to lend yuan to one another outside mainland China and offering hedging services that weren’t available before. The result, say bankers, is reminiscent of the eurodollar market in the early 1960s, when extensive dealings in the greenback outside U.S. borders first took off.

The catalyst for this activity was an agreement signed June 19 between monetary authorities in mainland China and Hong Kong removing certain limits on usage of China’s yuan within Hong Kong. In the past, businesses were mostly confined to opening yuan accounts for trade-settlement purposes; now, accounts can be opened for any purpose. Businesses and individuals alike now can transfer yuan freely between accounts. Banks also can help businesses convert yuan without restriction.

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With the latest liberalization move, banks in Hong Kong are now freer than ever to take all that yuan and put it to work. Some speak of linking the interest rate paid on yuan deposits to the direction of the euro or gold prices. Frances Cheung, senior strategist at Crédit Agricole Corporate & Investment Bank, foresees a market for yuan interest-rate swaps as interbank lending in the currency gains momentum.

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Meanwhile, more and more yuan pour into Hong Kong. Monthly trade between Hong Kong and mainland China settled in yuan jumped tenfold from January to June to 13.24 billion yuan, or nearly $2 billion, and it’s set to rise more quickly since a pilot program allowing yuan settlement expanded to cover more of China in June.

Qu Hongbin, chief China economist at HSBC in Hong Kong, believes we are seeing just the tip of the iceberg. The anomaly, he says, is the fact that China conducts virtually all its trade in dollars, euros or yen. Historically, he says, “we’ve never seen a case where the world’s largest exporter uses other people’s currency for their trading.”

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