Financial centers slugging it out for piece of offshore yuan business

Chow said he believes that the daily individual conversion ceiling of 20,000 yuan in Hong Kong will soon be adjusted. Last October, when Hong Kong Monetary Authority Chief Executive Norman Chan visited Beijing, the People's Bank of China - the central bank - reacted favorably to his proposal to ease the limit.

In November, the Hong Kong Financial Services Development Council urged the Hong Kong government to "strive for further relaxation of the policies applicable to Hong Kong residents on renminbi exchange and remittance, in order to maintain the competitiveness of Hong Kong vis-a-vis other offshore renminbi centers."

"The revision of the cap is critical. The relaxation will largely fuel the demand, trade volume and variety of yuan products," Chow said.

"Very few people are interested in yuan-denominated investment tools such as equity-linked instruments, because it's too much trouble to acquire the principal," he said.

"Tight liquidity is also a bottleneck for yuan business. Smaller banks in particular find it hard to accumulate a sizable and stable capital pool to develop yuan products."

Shen Minggao, head of China research at Citibank, said that instead of lifting the daily yuan conversion ceiling in Hong Kong, it's more vital to widen access to the mainland capital market for overseas investors.

"What people want is products with reasonable return and controllable risk. For example, interbank negotiable certificates of deposit are attractive to foreign investors. But they are filtered out," he said.

Shen said that the segregation of the domestic market is slowing progress in the development of offshore yuan investment channels.

"Somehow, you need to allow people to have access to equities and real estate on the mainland so they have the underlying assets to develop yuan-denominated products offshore. You can't expect them to create investment instruments, such as mutual funds, with nothing."

Measures such as allowing foreign companies and individuals in the China (Shanghai) Pilot Free Trade Zone to invest in the mainland securities market are "a drop in the bucket", Shen said.