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Hong Kong Yuan Deposits Drop for 1st Time Since October ’09

Hong Kong’s yuan deposits declined for the first time in two years as expectations for short-term appreciation of the currency weakened, resulting in less remittances from cross-border transactions.

Savings denominated in the Chinese currency fell 0.6 percent to 618.5 billion yuan ($97 billion) at the end of October from a month before, according to a statement from the Hong Kong Monetary Authority. This year’s average monthly increase is 30.4 billion yuan.

“There’s a sudden switch away from the demand for offshore yuan,” said Daniel Hui, a Hong Kong-based senior currency strategist at HSBC Holdings Plc., which owns two of the city’s three biggest banks. “It’s more to do with global market conditions than a change in medium-term yuan appreciation expectations.”

The offshore yuan traded in Hong Kong has fallen 1.5 percent to 6.3930 per dollar since the end of September as European debt crisis sapped demand for emerging-market assets and Chinese export growth and inflation slowed. The offshore yuan has been weaker than the onshore rate in Shanghai for 10 weeks, according to data compiled by Bloomberg.

The modest decline in yuan deposits and trade settlement activities gave “some comfort” about the overall resilience of the offshore yuan market, Hui wrote in a report released today. He predicted a “sizeable decline” in October in an earlier report released Nov. 2.

The yuan traded in Shanghai fell 0.4 percent to 6.3789 per dollar in November, the biggest monthly decline since August 2010. Twelve-month non-deliverable forwards fell 0.5 percent this month to 6.3965, a 0.3 percent discount to the onshore rate.

Trade Remittances

Yuan trade settlement is a major contributor to the build-up of the yuan deposit base in Hong Kong. The total value of remittances of the yuan-denominated cross-border trade settlement in October dropped 15 percent from a month ago, to 161.5 billion yuan, HKMA data show. That’s the lowest level since July.

“With the yuan being cheaper in Hong Kong, if you are a Chinese exporter or an offshore importer, you are incentivized to take the renminbi and remit it to China,” HSBC’s Hui said.

Corporate demand is expected to show only a “gradual” pickup and investors should only resume yuan purchases in Hong Kong once the “global risk environment” shows signs of sustainable improvement, he said.

Yuan deposits in the city have jumped more than 10-fold in the past two years from 57.3 billion yuan in October 2009, according to data from the authority, the city’s de-facto central bank.

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