Hong Kong May ‘Tap Brake’ on Record Yuan Deposits

Hong Kong may introduce measures to slow growth in the city’s yuan deposits to help stem an exodus of local currency from the financial system, according to CCB International Securities Ltd.

The policy makers may try “tapping the brake as the surge in deposits is bothering; everything is happening so fast,” Paul Schulte, global head of financial strategy at CCB International, the Hong Kong-based brokerage arm of China’s second-largest bank, said in a May 18 interview in the city. “If you don’t slow down the renminbi conversion, the liquidity in Hong Kong will continue to dry up and that’s a problem for the banking system.”

The city’s deposits of yuan, which is also known as the renminbi, tripled to a record 451 billion yuan ($69 billion) in the last two quarters, Hong Kong Monetary Authority data show. The head of the de facto central bank, Norman Chan, said this week banks are facing “upward” pressure on lending and deposit rates as credit demand soaks up funds.

The city’s government may lower the current yuan purchase quota of 20,000 yuan a day for individual investors to stem the expansion of renminbi deposits, which now account for 8 percent of total funds placed with banks in the city, Schulte said. He joined the unit of China Construction Bank Corp. in September.

The Hong Kong dollar loan-to-deposit ratio for local banks was 81.7 percent at the end of March, up from 71 percent at the end of 2009, according to the HKMA. Last year, deposits in the currency rose 7.2 percent and loans grew 17.6 percent.

HSBC Holdings Plc and Standard Chartered Plc (2888) are among lenders raising mortgage rates after the central bank in April warned of the risk of a “credit-fueled property bubble.” HSBC home-loan charges are now as high as 2.2 percent, compared to about 0.9 percent in November.

U.S. Dollar Slide

Charges on mortgages in the city, which are mostly linked to Hong Kong interbank rates, or Hibor, began climbing at the end of 2010 after shrinking to a record low of 0.89 percent in November, according to mortgage service and data provider mReferral Mortgage Brokerage Services. The average rate was 1.21 percent in April.

The city’s exchange rate is fixed at about HK$7.80 to the U.S. dollar, which has weakened against 14 of 16 major currencies this year, according to data compiled by Bloomberg. The yuan has strengthened 5 percent versus the greenback since a dollar peg ended in June 2010.

“You don’t want to hold the Hong Kong dollar because it’s tied to the U.S. dollar,” Schulte said. “What’s happening here is a growing sense of discomfort with the U.S. dollar.”

Yuan Assets

Hong Kong will have more regular sales of yuan-denominated shares and Chinese government debt as deposits of the currency double, K. C. Chan, the city’s secretary for financial services and the treasury, said last month.

Billionaire Li Ka-shing’s Hui Xian Real Estate Investment Trust, Hong Kong’s first yuan-denominated initial public offering, slumped 12 percent in trading since its debut on April 29, easing concern that stock sales will sap demand for bonds denominated in the Chinese currency.

Borrowers including Volkswagen AG raised a record 47.5 billion yuan selling dim sum debt so far this year, exceeding the 35.7 billion yuan issued in all of 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Fion Li in Hong Kong at fli59@bloomberg.net; Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Paul Panckhurst at ppanckhurst@bloomberg.net

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