The People’s Bank of China has abolished the daily 20,000 yuan ($3,260) conversion cap for Hong Kong residents effective Nov 17, the day that the Shanghai-Hong Kong Stock Connect program will be launched, the Hong Kong Monetary Authority said on Nov 12.

Banks will square positions arising from yuan conversions conducted by Hong Kong residents in offshore markets instead of onshore markets. As a result, restrictions for onshore conversion will no longer apply.

The change will allow Hong Kong residents to buy or sell the yuan more freely.

Chief Executive Leung Chun-ying said in Beijing that the move would help Hong Kong maintain its status as an international financial center.

Leung also thanked the HKMA and the city’s banking industry for their efforts in securing the new currency exchange arrangement with the mainland.

“The removal of the conversion limits will mean more convenience for local residents to participate in Stock Connect and other yuan transactions,” HKMA Chief Executive Norman Chan said during a news conference in Hong Kong.

“The new arrangement will also facilitate the introduction of yuan-denominated investment products by financial institutions in Hong Kong and enhance the city’s position as an offshore yuan business center,” Chan said.

He said that he believed Hong Kong’s yuan liquidity pool, at 1.1 trillion yuan, is large enough to meet projected demand for investing under the Stock Connect program.

The PBOC and HKMA signed the revised clearing agreement on yuan business in July 2010, removing the restrictions on yuan deposit holders transferring cash to buy wealth management products to boost the city’s status as an offshore yuan financial hub.

The 20,000 yuan daily conversion limit was not removed at that time.

“This new arrangement is instrumental to the further growth of the Hong Kong offshore yuan center,” said Yang Ruhai, head of yuan business at Bank of China (Hong Kong) Ltd, which is a clearing bank for yuan transactions in Hong Kong.

The removal of the cap “will allow customers greater flexibility in meeting their requirements”, said Anita Fung, HSBC Holdings Plc’s chief executive officer for Hong Kong.

Nixon Chan, executive director and head of retail banking and wealth management at Hang Seng Bank Ltd, a wholly owned unit of HSBC, said: “We plan to launch more yuan investment services and structured products in the near future to meet the wealth management needs of customers.”

The Hong Kong Association of Banks, in a statement on Nov 12, called the arrangement “a significant step forward in promoting the internationalization of the yuan”.

‘NO GAINS TAX’ FOR STOCK CONNECT

Regulators may waive the capital gains tax on transactions through the Shanghai-Hong Kong Stock Connect program that is scheduled to begin on Nov 17, according to brokerages on the Chinese mainland and in Hong Kong.

The move, which is widely expected to be announced soon, will remove one issue for investors. Stockbrokers have said that the tax is confusing because it applies only under mainland rules. Hong Kong abolished the capital gains tax long ago.

“I heard that there will be a tax exemption period in the first six months after the launch of the program. Some people said that the tax holiday could last for as long as three years,” a senior brokerage operator in Hong Kong said.

“We learned from the Shanghai Stock Exchange that a new tax arrangement will be announced soon, and the authorities will give more favorable treatment to Stock Connect investors compared with the Qualified Foreign Institutional Investors and renminbi QFII programs,” the Shanghai-based National Business Daily reported, citing a source at Industrial Securities Co Ltd.

The authorities have never clarified the question of capital gains tax for the QFII and RQFII programs. The existing regulations imply that foreign equity investors should pay 10 percent, but the government has never collected any tax. However, international investors routinely make a 10 percent provision for such a contingency.

K.C. Chan, Hong Kong’s secretary for financial services and treasury, said on Nov 9 that new tax rules will be announced “within a very short time”. He was not available for comment on Nov 12.