Tide of Yuan Ebbs in Hong Kong

Source: Wall Street Journal Fiona Law

HONG KONG—More yuan deposits than in any previous month flowed out of Hong Kong in December as more importers paid their mainland suppliers in the currency, taking advantage of efforts by Beijing to make it easier to move funds back to China.

Bankers cited overseas investors' reduced interest in holding the Chinese currency, given reduced confidence the yuan will keep rising, as another reason for the outflow.

Local banks, which used to have more yuan deposits than they could use, are now looking for more yuan funds to take advantage of lending opportunities to Chinese companies amid tight credit conditions on the mainland. Their cost of borrowing in the currency is rising as a result.

The yuan market in Hong Kong, China's laboratory for liberalizing its currency, has taken off since Beijing relaxed rules for the use of yuan in the city in July 2010. Deposits in yuan grew briskly, fueled by expectations that the currency will appreciate rapidly.

In recent months, however, the growth in yuan deposits in Hong Kong has almost halted as investors shifted to the safe-haven U.S. dollar as markets gyrated in response to the euro-zone debt crisis and U.S. credit-rating downgrade in August.

By the end of December 2011, yuan funds parked in Hong Kong totaled 588.5 billion yuan ($93.2 billion), down 6.2% from 627.3 billion yuan, or renminbi, in November, according to figures the Hong Kong Monetary Authority released Tuesday.

"I still see some clients reducing their renminbi positions, and investors in general are unwilling to bet more money on the Chinese currency, as they expect only a moderate appreciation for the currency this year," said Thomas Poon, head of business planning and strategy for HSBC Holdings PLC in Hong Kong.

Until recently, the majority of yuan trade settlement has involved Chinese companies paying foreign suppliers in yuan. Now, bankers and analysts say, offshore companies are increasingly paying for their purchases from China in yuan because Beijing has extended a program allowing the use of yuan to settle cross-border trade to the entire country.

More companies are also moving yuan funds back to mainland China, taking advantage of initiatives announced by Chinese Vice Premier Li Keqiang in August to broaden the means for yuan to be repatriated to China, part of an effort to internationalize the currency.

As the pool of yuan in Hong Kong shrinks, local banks, eager to stock up on the currency in case of a surge in demand for loans, are competing harder for the available funds. Their cost to borrow offshore yuan is rising.

In January, five lenders issued eight certificates of deposits with maturities from six months to a year, raising a combined US$330 million worth of yuan funds, 50% more than the amount of cash tapped with the same tools in December, according to data provider Dealogic. That compares with US$95 million worth of similar issues in November, Dealogic data showed.

Certificate of deposits are securities that banks and companies issue to raise short-term cash.

One bank that has tapped the yuan money market at a higher cost is Bank of Communications Co.'s Hong Kong unit. In January, it paid an interest rate of 3% for a 240 million yuan 12-month yuan-denominated CD. In April last year, it paid 0.7% for a larger 12-month CD, according to Dealogic.

"As long as corporate customers' renminbi loan demand continues to mount, banks' push for liquidity in CNH (offshore yuan) will remain in place in the long run," said Tommy Ong, head of wealth-management solutions at DBS Group Holdings Ltd.'s Hong Kong unit.

Hong Kong's yuan lending has started to pick up in the past few months. Outstanding yuan loans in Hong Kong ballooned to 30.8 billion yuan by the end of last year from 2 billion yuan early last year, according to the HKMA.