"But Hong Kong would retain an edge over those countries, in terms of having a mature financial market and financial expertise," she added.

"The move will push Hong Kong a step closer to develop into an offshore yuan hub," said Paul Tang, chief economist at Bank of East Asia.

Tang said the arrangement intends not only to make Hong Kong an offshore yuan hub but also to help open up the mainland's financial system.

The ultimate intention of the move is to boost the role of the yuan in the international monetary system, said Frances Cheung, an economist at Standard Chartered Bank.

"Turning Hong Kong into a offshore yuan hub is just a side effect," she said.

Hong Kong is the only offshore market that is allowed to issue yuan bonds, which helps its drive to become an offshore yuan center, she said.

How fast Hong Kong develops into an offshore yuan center will depend on the pace at which the central government expands the role of the yuan, said economists.

Signs are encouraging in this aspect, according to some observers.

In a meeting with Hong Kong's Chief Executive Donald Tsang last month, Premier Wen Jiabao said the central government will try to expand Hong Kong's yuan bond market.

Mainland units of Hong Kong banks will soon be allowed to issue yuan bonds in the administrative region and the Ministry of Finance is considering issuing yuan bonds in Hong Kong, the Premier said.

The central government is also studying a proposal to extend financial aid to developing countries in yuan instead of in US dollars, according to a report by the South China Morning Post.

China will then allow beneficiary nations to trade yuan reserves in Hong Kong (if they do not use up all the aid) to buy Chinese products, the report said, quoting unidentified sources.

The move, if it materializes, will boost Hong Kong's chances of becoming an offshore yuan hub, Standard Chartered Bank's Cheung said.

Economists said the central government, at some point in the future, will likely announce other measures to boost yuan use in Hong Kong such as allowing yuan lending and developing yuan-based assets other than yuan bonds.

(China Daily May 18, 2009)