Hong Kong Yuan Deposits Fall by Most Since 2008 on Trade Flow

Yuan deposits in Hong Kong declined by the most in three years as trade settlements with China increased, intensifying competition among banks in the city for the currency.

Savings denominated in the Chinese currency fell 6.2 percent to 589 billion yuan ($93 billion) at the end of December from the previous month, according to a statement from the Hong Kong Monetary Authority yesterday. That’s the biggest monthly drop since December 2008.

A shrinking yuan deposit base is spurring Hong Kong banks to offer higher interest rates to attract customers, as lenders sought to bolster their reserves. The HKMA, seeking to promote the city as China’s main offshore currency center, this month relaxed yuan capital requirements for local banks after a jump in funding costs for the currency.

“Last month’s yuan deposit decline is most likely due to the increased remittances into China for trades, which means less yuan stays in the city,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “That’ll lead to higher rates as banks have to compete for yuan liquidity.”

The six-month interbank rate was 2.05 percent yesterday, up from 0.78 percent a year earlier, after reaching a record 2.9 percent on Dec. 21, according to data compiled by Bloomberg.

Higher Rates

DBS Group Holdings Ltd. raised interest rates on yuan savings yesterday, offering 2.26 percent on 12-month deposits of 100,000 yuan or more to its high net-worth clients. HSBC Holdings Plc also said it offered as much as 1.5 percent for three-month deposits on new funds of at least 20,000 yuan.

The city’s total remittance of cross-border trade settlement advanced 29 percent to 239 billion yuan in December, from 185 billion yuan in the previous month, HKMA data show. Yuan deposits rose 87 percent in 2011 from a year ago, slower than the 400 percent surge in 2010.

Shanghai will allow “significantly more” foreign participation in its financial markets as part of plans to become a global center for yuan trading by 2015, according to a plan jointly published by the National Development and Reform Commission and the municipal government on Jan. 30.

The yuan advanced 0.36 percent to close at 6.3085 per dollar yesterday in Shanghai, paring this month’s decline to 0.23 percent, according to the China Foreign Exchange Trade System.

In Hong Kong’s offshore market, the yuan advanced 0.17 percent to 6.3025, extending this month’s gain to 0.7 percent, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards rose 1.6 percent to 6.2835 in January, the most since August. The contracts, which were little changed yesterday, are at a 0.4 percent premium to the onshore spot rate.

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