Up to US$10 billion worth of Chinese currency is circulating in Hong Kong, but local banks can't get their hands on it.

Hong Kong lenders, desperate for new sources of revenue to counter stagnant growth, have been lobbying Beijing to set up an offshore yuan trading market in the former British colony to allow them to take deposits of cash brought in by the flood of increasingly rich Chinese tourists and business travellers.

Currently, most mainland tourists exchange yuan, or renminbi, for Hong Kong dollars in the unregulated market in Hong Kong, although more and more Hong Kong restaurants, retailers and jewellery shops are accepting yuan.

Supermarket chain ParknShop started accepting yuan payments two weeks ago, and ships the currency back into China to fund purchases there.

"Renminbi circulation in Hong Kong has become a reality, so to create an overseas yuan market is something that is going to happen sooner or later," a source at the State Administration of Foreign Exchange (Safe) in Guangdong, the Chinese province adjoining Hong Kong, told Reuters.

An overseas yuan trading market would also help curb rampant grey market trade in Hong Kong and Guangdong, analysts said.

But industry watchers said Beijing is unlikely to allow the formation of such a market soon for fear it may decrease the stability of the yuan, which unlike the Hong Kong dollar is not fully convertible. Both are pegged to the US dollar.

"There are some problems about yuan circulation in Hong Kong," a spokeswoman for SAFE said by phone from Beijing. "We are studying the issue."

China has vowed repeatedly to guard the stability of the renminbi - or "people's money" - which it regards as key to economic growth. Full convertibility remains years away.

"Hong Kong banks have long hoped to take the deposits and I think Beijing is moving in that direction," said Li Siu Kei, assistant general manager of the Hong Kong branch of Bank of Communications, China's fifth largest lender. "In the long run, I believe it is going to happen."

Analysts said an offshore yuan trading market would likely trigger an outflow of yuan from China - opening the currency to the possibility of volatility - as Hong Kong banks would probably lure deposits with more flexible interest rates.

Rates in China are rigidly set by the central bank. Moreover, deposit interest income is taxed on the mainland, but not in Hong Kong, which reverted to Chinese rule in 1997 but maintains a high degree of autonomy.

Hong Kong banks hope that with a yuan market, they could repatriate the deposits to mainland China to boost their nascent operations there. Hong Kong banks, like other overseas banks, can't take yuan deposits in China from Chinese companies until the end of this year and from individuals until 2007.

Analysts said Beijing may eventually allow limited overseas offshore yuan trading by requiring Hong Kong banks to repatriate yuan through state-controlled lenders like BOC Hong Kong (Holdings) Ltd to Beijing's central bank - rather than shipping it directly to their own mainland branches.

"Clearly, that's going to be something on the cards at some point and time," said Paul Sheehan, regional banking analyst at ING Financial Markets in Hong Kong.

Thanks to two decades of fast economic growth, more Chinese travel abroad, especially to Hong Kong. Mainland Chinese arrivals jumped 53 per cent last year to a record 6.83 million.

Beijing allows mainland tourists to bring 6,000 yuan (US$725) and buy up to US$2,000 for each trip. Many carry far more.

Mainland tourists now can change their money at select Hong Kong banks, including BOC Hong Kong. But more do it at the legions of unregulated money-changing kiosks.

While some visitors use their Hong Kong dollars to buy knick-knacks, others buy Hong Kong stocks. Nobody knows how much of this so called "hot money" is in the stock market, but its flow is often linked to the wide swings in the prices of some Hong Kong-listed Chinese stocks.

"A lot of it gets passed through the grey market, which is actually where most transactions occur right now," said Anthony Lok, an analyst at Bank of China International. The money changers usually ship the yuan "in briefcases and speedboats" to Guangdong for sale to foreign tourists there, he added.