"This is a development of strategic importance," Yam wrote in his online weekly column, referring to the joint release on Thursday of a regulation by the Chinese mainland financial authorities to pave the way for the yuan settlement pilot scheme.

"If the designated firms on the mainland and their trading counterparts in Hong Kong wish to settle their transactions in renminbi, they can do so," he said.

The launch of the pilot scheme has to be supported by yuan- denominated trade finance, which in turn has to be supported by access to renminbi, Yam said.

The banks can obtain renminbi either through interbank transactions using available renminbi liquidity in the system, or through their access to the renminbi market on the mainland, subject to certain limits set by the mainland authorities.

"In other words, once the scheme is implemented, we will have a much wider scope of mobility of renminbi funds between the mainland and Hong Kong," Yam wrote, adding that it is necessary to always proceed cautiously in financial reform and liberalization.

What is important is, however, that the supporting financial infrastructure will be further developed and Hong Kong will be even more ready to handle other types of transactions denominated in renminbi as they come along, he wrote.

Yam recalled how he raised the possibility of developing renminbi business in Hong Kong with mainland financial authorities on a visit to Beijing in 2001, which marked the beginning of the development of renminbi business in Hong Kong.

Renminbi deposits, remittances, exchange and credit cards were introduced in Hong Kong in 2004, followed by the introduction of renminbi checks in 2005 and the issue of renminbi bonds by mainland banks in 2007. The pilot scheme was another breakthrough.

"Hong Kong will be the natural place for arranging these transactions outside of the mainland. This is the key to the maintenance of the status of Hong Kong as an international financial center," Yam concluded.