Hong Kong Allows Non-Residents to Buy Yuan Offshore

Hong Kong allowed non-residents to purchase an unlimited amount of yuan, seeking to defend its position as the global hub for international trade and finance in the currency.

While conversion at the offshore rate will start Aug. 1, the buyers will need to seek permission to send the currency into China, Hong Kong Monetary Authority Deputy Chief Executive Eddie Yue told a news conference today. The 20,000 yuan ($3,130) daily conversion quota on the city’s permanent residents at the onshore rate will be kept unchanged and a maximum of 80,000 yuan can be sent into the mainland every day, he said.

Hong Kong’s biggest banks have been lobbying China to relax restrictions on the city’s yuan business as competition from London and Singapore intensifies. The halt in the yuan’s appreciation against the U.S. dollar this year has damped appetite among residents for assets denominated in the Chinese currency, with the city’s yuan deposits dropping 35 billion yuan in the first five months to 554 billion yuan.

“This will raise Hong Kong’s edge in the competition with other financial centers,” Ngan Kim-man, head of the renminbi business strategy & planning department of Hang Seng Bank Ltd., said by phone today. “If there are further relaxations from China, Hong Kong can embrace these new opportunities like other financial centers.”

Yuan Conversion

The People’s Bank of China has already ruled out the possibility of raising yuan conversion quotas for Hong Kong residents, according to the Chinese central bank’s Deputy Governor Hu Xiaolian on June 30. Allowing non-residents to buy yuan is feasible “as long as it doesn’t involve the onshore yuan,” Hu said, adding progress could be made “in the foreseeable future.”

While Hong Kong was selected as the nation’s major offshore yuan trading hub under the 12th five-year plan, its status is being challenged. U.K. Chancellor of the Exchequer George Osborne in January called on London to expand its yuan trading. The British capital had 109 billion yuan of customer and interbank deposits and that is “growing strongly,” according to an April 18 report by research firm Bourse Consult.

Singapore’s stock exchange plans to start listing securities denominated in the Chinese currency, according to a statement on July 6.

“The HKMA will continue to study further expansion in the offshore yuan business with local banks and the authorities in China,” the central bank’s Yue said. “We hope today’s move can help banks to widen their customer base and strengthen their competitiveness.”

Dim Sum

The yuan in Hong Kong had been trading at a premium to the Shanghai spot rate since the offshore market started in 2010. In September 2011, it turned into a discount as investors in Europe and the U.S. divested emerging-market assets. The yuan in Hong Kong traded at a record 1.9 percent discount to the onshore rate on Sept. 23.

The discount has since diminished as the spot rate in Shanghai weakened on slowing Chinese economic growth. The currency slipped 0.04 percent to 6.3895 per dollar as of 5:58 p.m. in Hong Kong, compared with the 6.3885 closing price in Shanghai, according to data compiled by Bloomberg.

Sales of so-called Dim Sum bonds have climbed 24 percent to 109 billion yuan this year, after more than quadrupling in 2011, according to data compiled by Bloomberg. Average yields on the securities have dropped 56 basis points to 5.39 percent, a Bank of China Ltd. index showed.

“The immediate impact of non-residents’ participation could be small as the market focus is still on Europe’s debt crisis,” said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd., Singapore’s largest bank. “However, this is going to boost demand for offshore yuan investment products in the long term.”