Bank of China Cuts Interest Rate on Record Deposits of Yuan in Hong Kong

Bank of China Hong Kong Ltd. cut its interest rate for yuan deposits in Hong Kong after money held in the accounts rose to a record in February, reflecting increased demand for trade and investment in the currency.

The lender, the city’s sole clearing bank for yuan banking services, cut the annual rate to 0.629 percent from 0.865 percent, spokeswoman Angel Yip said yesterday. Deposits climbed 10 percent in February from the previous month, or more than fivefold from a year earlier, to a record 407.7 billion yuan ($62.3 billion), the Hong Kong Monetary Authority reported.

“People have been converting Hong Kong dollars into yuan because of expectations China’s currency will appreciate, and we’re slowly having growth of yuan investment products,” said Gavin Parry, managing director of Parry International Trading Ltd. in Hong Kong. “If the deposits continue to increase at a faster pace than existing investment opportunities, rates could fall further as banks can’t find many uses for deposits.”

Premier Wen Jiabao is seeking to promote use of the yuan as an alternative to the U.S. dollar in global trade and investment, without adding to appreciation pressure. The People’s Bank of China said last week it will broaden cross- border use of the yuan and facilitate the repatriation of overseas yuan funds.

“The move is to boost yuan liquidity in Hong Kong so that enough capital is available to be invested in yuan-denominated financial products in the near future,” Bank of America Merrill Lynch economist Lu Ting wrote in an emailed note today.

The yuan gained 4.1 percent in the past year and touched 6.5452 per dollar today, the strongest level since the country unified official and market exchange rates in 1993. The currency traded at 6.5479 in Shanghai. Non-deliverable forward contracts show expectations it will climb 2 percent in the coming year.

Approved Programs

The central bank earlier this month expanded trial use of yuan for international trade settlement to the entire country from 20 provinces. The settlement amount reached 506.3 billion yuan last year, according to the central bank data. The program started in July 2009. China also approved 29.2 billion yuan of quotas for five foreign institutions to invest in its interbank bond market as of December.

The lower rates were unlikely to change the trend of rising deposits given the expectations of yuan appreciation and the dominance of the city’s exports to China in local-currency settlement, Citigroup Inc.’s Hong Kong-based economists Adrienne Lui and Cheng-Mount Cheng wrote in a report today.

HSBC Holdings Plc. reduced the top range of rates on yuan time deposit accounts to 0.6 percent from 0.76 percent, said Mark McCombe, the lender’s chief executive officer for Hong Kong at a briefing today. The London-based bank kept the rate on regular saving accounts at 0.45 percent “to encourage customers to continue to save in the currency,” McCombe said.

Trade Settlement

Hong Kong’s trade settlement denominated in yuan rose “significantly” to a monthly average of 95 billion yuan in the first two months of 2011, Peter Pang, deputy chief executive at the Hong Kong Monetary Authority, said in a transcript published on the regulator’s website March 25. That compared with a monthly average of 57 billion yuan in the second half of 2010, he said.

People will need more better-yielding products to keep the currency as deposits, said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong.

Li Ka-shing, Hong Kong’s richest man, is planning to sell shares in a Chinese real-estate investment trust in Hong Kong’s first yuan-denominated initial public offering, according to a sales document obtained by Bloomberg last week.

Regulators may also start to let foreign companies invest yuan raised offshore in the nation’s financial markets within months in a program dubbed the mini-qualified foreign institutional investor, three investment firms said in January.

Fiduciary Account

Separately, BOC Hong Kong, a unit of China’s third-largest bank, said it will allow lenders involved in yuan settlement in Hong Kong to deposit the currency in a special account with China’s central bank, starting from April 8. It said China’s central bank will cut the interest rate offered to the clearing bank to 0.72 percent from 0.99 percent, effective today.

The Hong Kong Monetary Authority said such fiduciary accounts for yuan settlement are designed to address the issue of credit limits on funds placed with the clearing bank, which had to account for them on its balance sheet. Bank of China faced risks that one of its customers would go bankrupt before it could settle trades, leaving it with losses.

“The custodian account is a big step forward as it eliminates the banks’ difficulty on parking excessive yuan liquidity,” Becky Liu, a fixed-income strategist at HSBC Holdings Plc, said in a phone interview. Some banks have been investing such funds into the yuan bond market in Hong Kong.

Dim Sum Bonds

Sales of yuan-denominated debt in Hong Kong, known as dim sum bonds, totaled 17.4 billion yuan in the first quarter of the year, compared with zero in the same period of 2010, according to data compiled by Bloomberg.

“Abundant idle renminbi cash that keeps funding costs low will continue to attract renminbi bond issuances this year,” Citigroup’s economists Lui and Cheng wrote.

The average yield for yuan-denominated bonds in Hong Kong has fallen to 1.958 percent from a high of 2.28 percent on Dec. 31, according to data compiled by HSBC. That’s less than half the 4.097 percent average yield paid by government-linked companies in China, according to Bank of America Merrill Lynch’s China Quasi-Government Index.

HSBC, the top-ranked underwriter of dim sum bonds this year, expects sales will more than triple to between 120 billion and 150 billion yuan in 2011 on rising demand for China’s currency outside the country.

Unilever sold 300 million yuan of debt in Hong Kong this month at a yield of 1.15 percent, the first European consumer company to issue in the market. The yield reflects investor expectations that returns will be boosted by yuan appreciation. The yuan is a unit of China’s currency, the renminbi.

To contact the reporters on this story: Fion Li in Hong Kong at fli59@bloomberg.net; Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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