The central government unveiled a 14-point package allowing Hong Kong businesses to settle deals in yuan in Guangdong province last December but the policy is having a rough start amid the volatile currency exchange market.

"We export our garment products to Europe and other Western countries. Our foreign partners recently told us they don't want to pay in yuan because of its appriciation," said Kwan, co-owner of a Hong Kong-based garment firm with a production line in Dongguan, a Guangdong city an hour's drive north of Hong Kong.

The yuan-euro exchange rate has been volatile recently, jumping from 11.11 yuan a euro in May 2008 to 8.84 yuan a euro currently.

The unstable exchange rate is biting into Kwan's profits since foreign buyers insist on paying in foreign currencies but production costs are in yuan, he said.

Kwan recently locked in a set exchange rate for certain expenses and set aside some money to pay his mainland manufacturers.

"If the yuan continues to appreciate I may go back to paying my manufacturers in Hong Kong dollars," he said.

Another Hong Kong garment trader, Wong, agreed. Wong's foreign partners find the changing currency inconvenient for settling orders, he said.

It is too early to say if the yuan settlement policy will flop, said Andrew Fung, Hang Seng Bank's general director.

"The central government hasn't explained how the country will open its capital account or how much it will relax control of the yuan," said Fung. "So it's still hard to say if the policy is benefiting Hong Kong businesses or not."

Hong Kong lenders with a strong mainland client basis will likely benefit from the policy most if it proves workable, said Fung.

(China Daily February 23, 2009)