5 February 2004

Dear Sir / Madam,

Personal Renminbi Business in Hong Kong

The Government announced on 18 November 2003 that, following approval from the State Council, the People's Bank of China ("PBoC") has agreed to provide clearing arrangements for licensed banks in Hong Kong to conduct personal Renminbi ("RMB") business. The scope of personal RMB business to be offered will be confined mainly to transactions with individuals with Hong Kong Identity Card to facilitate their personal spending. This circular provides guidance to banks on the key supervisory issues involved.

According to the PBoC's Announcement No. 16 of 2003, the Clearing Bank appointed by the PBoC to offer clearing services for this scheme will enter into an "Agreement for Settlement of Personal Renminbi Business in Hong Kong" ("Settlement Agreement") with individual licensed banks in Hong Kong that intend to operate personal RMB business (hereafter referred collectively as "Participating Banks"). The latter will, on a voluntary basis, accept the terms and conditions of the Settlement Agreement in conducting their personal RMB business. The scope of personal RMB business includes deposit, exchange, remittance and card business, and the relevant details are explained in the Settlement Agreement between the Clearing Bank and Participating Banks.

As in the case of any other new business initiatives, banks interested in engaging in personal RMB business should ensure that they have proper internal controls and systems in place to monitor the relevant risks and ensure compliance with the scope of business and the arrangements provided for in the Settlement Agreement signed/to be signed with the Clearing Bank. Potential Participating Banks should therefore study carefully the terms of and contractual obligations under the Settlement Agreement to ensure that they fully understand the relevant requirements. Furthermore, the Settlement Agreement provides that individual Participating Banks should compile internal guidelines for their personal RMB business and should file a copy of such internal guidelines with the HKMA, which will in turn make a copy available to the PBoC. Participating Banks are therefore requested to file their internal guidelines with the HKMA no later than two weeks after commencement of their personal RMB business. On the basis of such internal guidelines, the HKMA will assess whether the banks concerned have put in place adequate controls for their personal RMB business.

Participating Banks should also consider and plan what operational resources are to be deployed to cope with their RMB business activities such as how to handle the possibility of an upsurge in branch traffic, especially for the initial period of the new services, the need for adequate staff training, procedures for handling suspicious counterfeit RMB banknotes, etc. On the issue of counterfeit banknotes, the Clearing Bank will help provide training to Participating Banks and sponsor relevant promotional activities.

One key issue relating to personal RMB business is whether this may give rise to money laundering concerns. Participating Banks are requested to heighten the awareness of their staff involved in such business to possible money laundering transactions. Compliance staff should also review existing anti-money laundering arrangements to ensure that they are adequate for personal RMB business. These arrangements should be consistent with the guidance on prevention of money laundering promulgated by the HKMA.

In accepting RMB deposits from customers, Participating Banks should ensure that their systems are capable of differentiating and recording the amount of deposits that are made in cash or through the conversion of HK dollars and other currencies. This will facilitate the reporting of the aggregate amount of deposits made through the two different forms in the new monthly return to be introduced by the HKMA for personal RMB business.

In providing RMB exchange and remittance services, Participating Banks should bear in mind that some of the maximum amount requirements (e.g. the equivalent of RMB 20,000 for exchange transactions conducted through RMB accounts and RMB 50,000 for remittance) are applied on a per person per day basis. Participating Banks should therefore ensure that their systems are capable of monitoring compliance with such requirements. For example, where multiple accounts are opened for a single customer by a Participating Bank, the systems of the bank concerned should be able to aggregate the amount of exchange or remittance activities in relation to different accounts of the same customer for effective compliance monitoring.

As regards the provision of service to merchants for exchange of RMB into Hong Kong dollar, Participating Banks should put in place appropriate policies and procedures to ensure that only merchants engaging in the relevant businesses set out in the Settlement Agreement are offered such service. In considering the requests of merchants for the provision of such exchange service, Participating Banks should adopt the criteria set out in the Settlement Agreement.

In managing personal RMB business, Participating Banks should have in place adequate policies and procedures to ensure that : (a) there are adequate funds for meeting daily operational needs such as deposit withdrawal and money exchange; and (b) their positions in RMB are basically balanced as provided for in the Settlement Agreement.

The Clearing Bank will provide an arrangement under which Participating Banks may buy/sell RMB from/to the Clearing Bank in order for the former to maintain a basically balanced position in RMB. To allow some degree of flexibility in meeting this requirement, individual Participating Banks may apply through the Clearing Bank to the PBoC for a "RMB Open Position Limit" which represents the maximum amount of open position that the banks concerned can maintain immediately after the cut-off time for squaring their positions with the Clearing Bank on each business day. In this connection, please note that open position arising from the RMB credit card operations (including both the amounts payable arising from card usage and the RMB amounts receivable from cardholders) should be disregarded when calculating the RMB open position for this purpose.

Participating Banks are also reminded that the HKMA framework for supervising foreign exchange risks as set out in our circular dated 31 May 1990 (Guideline 7.1) also applies to the open position maintained in relation to RMB.

The HKMA will review the personal RMB business of Participating Banks during off-site reviews and on-site examinations of the banks concerned. To enable the HKMA to effectively supervise and monitor such personal RMB business, all licensed banks are required to submit, under Section 63(2) of the Banking Ordinance, a new Return of RMB Business Activities (MA(BS)16), a copy of which is at Annex A. The first return should cover the position as at end of February 2004. To allow time for licensed banks to adjust their systems to automatically capture the statistics required, licensed banks are allowed to submit the returns for February to June 2004 no later than 28 days after the end of each reporting period. The returns from July 2004 onwards shall be submitted within 21 days after the end of each reporting period. As the permanent STET template for submission of the new return is being prepared, licensed banks will be provided shortly with a temporary Excel template for return submission until the permanent template is available.

Last but not the least, the introduction of personal RMB business in Hong Kong is an important step in the development of the banking sector. It is therefore of utmost importance that banks should plan carefully for this new line of business, conduct such business properly and adhere to the business requirements set out in the Settlement Agreement strictly.

Should there be any questions arising from this circular, please feel free to contact Mr Arthur Yuen (Tel : 2878-1982) or Mr Thomas Leung (Tel : 2878-1609).

Yours faithfully,

Y. K. Choi
for Monetary Authority