Battle for Yuan Supremacy Fuels Hong Kong Banker Rivalry
Leo Lo, co-founder of a Hong Kong apparel maker whose customers have included Baby Dior, said he was surprised when five senior bankers visited his office this year in an industrial district of Kowloon offering to buy lunch.
Last year, companies such as his had to chase after the banks, only got access to lower-level executives, and meals usually went on clients’ tabs, Lo said. Now, lenders are pursuing him to offer loans, trade-settlement, hedging and investment opportunities in the Chinese currency as they vie for a bigger piece of Hong Kong’s expanding market for the yuan, also known as renminbi.
“Banks are under pressure to compete,” said the chief executive officer of Wenlo’s Apparel Manufacturer Ltd., who rejected entreaties from Citigroup Inc. (C), Hang Seng Bank Ltd. (11) and Standard Chartered (2888) Plc in favor of his three usual banks, which he declined to name. “They’re getting ready for the race. They know that renminbi is their future.”
As the world’s second-largest economy uses Hong Kong as a testing ground for currency convertibility by allowing banks to offer limited services in yuan, lenders are stepping up competition for that business. Apart from courting companies, they’re raising interest rates to draw depositors, hiring staff, holding investor roadshows, boosting underwriting of bonds, increasing lending and creating investment products.
Their increasingly fierce rivalry, coupled with a low interest-rate environment, has meant slowing profit expansion at banks operating in Hong Kong. That makes finding new revenue streams critical to maintaining growth.
“This is a growing business,” said Alex Cheung, managing director of institutional banking for Singapore-based DBS Group Holdings Ltd. (DBS) in Hong Kong, whose yuan business contributed to 24 percent of the local unit’s revenue in the three months to March, up from a quarterly average of 17 percent last year. “If you don’t do this, you will definitely lose out.”
Sales of so-called Dim Sum bonds, or yuan-denominated notes issued in Hong Kong by companies to fund expenses and expansion in China, is forecast to more than double to 300 billion yuan ($47.2 billion) this year. Last year’s 152 billion yuan, according to data compiled by Bloomberg, compares with HK$230 billion ($29.7 billion) in Hong Kong-dollar debt issued by private companies in the same period.
Dim Sum loans may also jump twofold to 60 billion yuan as firms seek to tap lower borrowing costs in Hong Kong to pay for manufacturing expenses in the mainland, where interest rates are higher.
The renminbi may become one of the world’s top three global-trade currencies in the next five years, according to HSBC Holdings Plc. (HSBA) As much as 50 percent of China’s trade is expected to be settled in the currency by 2015, up from 10 percent in the first quarter of this year, the lender said.
Banks operating in Hong Kong are vying for a larger piece of that business. They managed 571.2 billion yuan in offshore- renminbi trade in the first quarter, up from less than 50 billion yuan two years ago, according to the Hong Kong Monetary Authority.
“When the market first emerged, banks were testing the water only, but they are more aggressive now,” said Ivan Li, deputy head of research at Kim Eng Securities Hong Kong Ltd., citing the “huge potential” of the market. “Their business size has become much bigger, and they are keen to expand that further.”
Banks’ net interest margin, a measure of lending profitability, has shrunk for the last five years, the Monetary Authority said in its annual reports. The margin narrowed to an average of 1.25 percent last year from 1.87 percent in 2007.
In the same period, 16 foreign lenders won approval to operate in Hong Kong, according to the city’s de facto central bank. The number of banks competing to underwrite yuan bonds in Hong Kong almost tripled to 38 in 2011, from 14 the previous year, according to data compiled by Bloomberg.
First-half profit growth of the local unit of DBS slowed to 20 percent from 40 percent a year earlier, while Hong Kong-based Hang Seng Bank’s profit expansion slowed to 14 percent from 17 percent a year earlier.
Banks have been holding investor roadshows and education seminars to promote yuan use for trading or raising capital through Dim Sum bonds. Standard Chartered, which earned 23 percent of its pretax profit last year from Hong Kong and doesn’t break out earnings from renminbi operations, in June completed a five-month roadshow in Japan, China, South Korea and Taiwan for about 800 companies and investors. It was the bank’s biggest, said Joyce Li, a Hong Kong-based spokeswoman.
The goal is to keep clients current on trends, regulatory changes and new products and services, according to John Tan, head of global markets at Standard Chartered’s Hong Kong unit.
“We are not extremely concerned about competition, but we are keen to maintain our competitive edge in the long run,” Tan said. “It’s like car racing. One needs to be aware of the road condition and positions of other racers, but getting his own wheels in control is more important.”
Banks have been adding staff and creating teams for yuan operations. A “large number” have hired or relocated employees to Hong Kong in the past three years, as well as to London, which has also emerged as an offshore renminbi center and is setting up banking services in the currency, said Louisa Wong, founder and executive chairman of executive-search firm Bo Le Associates. She didn’t provide specifics.
HSBC this year appointed Paul Gooding to head its European renminbi business from its London headquarters after hiring Candy Ho as its Hong Kong-based head of Asia’s renminbi business development last year.
“We’ve seen a massive growth in the renminbi offshore business and the hiring of professionals,” said Pallavi Anand, director of recruiting firm Robert Half International Inc. (RHI) in Hong Kong. “The hiring outlook is looking fantastic because the renminbi business is hiring, and the activity here in Hong Kong is really looking very positive.”
HSBC, Standard Chartered, and Australia & New Zealand Banking Group Ltd. have been strengthening renminbi operations in Shanghai and London, Anand said. The banks declined to disclose related hiring figures. The “maximum demand” for bankers is from Chinese lenders, which are moving staff from Shanghai and Beijing to Hong Kong, she said.
“We expect to see a rising trend of Chinese banks hiring more aggressively as compared to their foreign and international counterparts,” she said.
Shares of HSBC dropped 1 percent in Hong Kong trading as of 3 p.m. local time while Standard Chartered fell 1.4 percent. The city’s benchmark Hang Seng Index declined 1.3 percent.
Deposits are another battle arena in the renminbi market, as the funds underpin lending in the currency. Savings in yuan made up 9 percent of the city’s total as of June, according to Hong Kong Monetary Authority data.
Savings in yuan surged in Hong Kong after China began allowing companies in July 2009 to settle transactions in its currency instead of U.S. dollars, and climbed more than 27-fold in five years to a record 627.3 billion yuan last November, Monetary Authority data show.
Those funds have since shrunk to about 558 billion yuan at the end of June as expectations of the currency’s appreciation receded and discouraged individuals from tapping the 20,000 yuan-a-day purchase limit allowed in the city.
Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia, cut his yuan-gain projection in July to 6.30 per dollar by the end of the year from 6.07. Ji’s estimates were the most accurate over the last six quarters, according to Bloomberg Rankings. Its current value of 6.35 to the U.S. dollar is down almost 1 percent this year, the most since the currency was allowed to fluctuate within a narrow range in July 2005. It appreciated 4.7 percent last year.
To attract yuan savings, HSBC raised the cap of its preferential interest rate on three-month renminbi deposits four times in the first half of the year to 3 percent from 1.1 percent, according to Yvonne Chuang, a Hong Kong-based spokeswoman. Standard Chartered increased the three-month rate three times to 2.5 percent, Li said.
Banks in Hong Kong won approval on July 25 to allow non- residents to buy an unlimited amount of yuan. They’re also issuing certificates of deposit: issuance jumped almost 21-fold to 118.1 billion yuan in the first quarter from 5.7 billion yuan at the end of 2010, Monetary Authority data show.
“Without deposits, banks won’t have the firepower to lend,” Li at Kim Eng Securities said. “This is why competition for yuan deposits is obvious and intense.”
Yuan deposits are expected to continue to grow. They may reach 1.5 trillion yuan by 2015, ANZ estimated in June.
Banks also have been pursuing businesses more aggressively for their yuan holdings. Sitoy Group Holdings Ltd. of Hong Kong, which makes handbags for Coach Inc. and Prada SpA in China, was approached for its renminbi deposits by more than five banks over the past year, said Chief Financial Officer Yu Chun-kau, 39. DBS, Hong Kong-based Wing Hang Bank Ltd. and Wing Lung Bank Ltd. were among them.
“Most of them didn’t have a relationship with us before,” he said, adding that they sought to sell tailor-made yuan trade- settlement services and better rates for corporate deposits. “We didn’t take the offer, though. We’ve been banking with HSBC and Hang Seng Bank for more than 20 years, and they also have this service.”
Some businesses are taking the bait. Elite Sino Holdings Ltd., a Hong Kong-based denim-jean and dress manufacturer for Topshop, Mango and French Connection UK with $10 million in annual revenue, recently closed its account at Hang Seng Bank and switched to Industrial & Commercial Bank of China (601398) (Asia) Ltd., the local unit of China’s largest lender.
“ICBC Asia’s Chinese connections are very important,” said Raymond Kam, 35, director of Elite Sino, which also has accounts at DBS and Standard Chartered. “While HSBC and Standard Chartered have many branches here in Hong Kong, if we need any support in China, mainland banks can help us faster.”
DBS had 3 percent of Hong Kong’s market for yuan deposits, or 15 billion yuan, as of the end of 2011, according to Hong Kong CEO Sebastian Paredes. Standard Chartered, HSBC and ICBC (Asia) don’t report similar figures. Bank of China (Hong Kong) Ltd., which has been the city’s sole yuan-clearing bank since 2003, is estimated to hold the majority of yuan deposits, according to Kim Eng’s Li.
“I think Chinese banks have advantages over foreign banks in the offshore-yuan market,” said Li, citing their relationships with mainland firms looking to do transactions outside of China. “Foreign banks need to put in extra effort to get the business.”
Standard Chartered’s Tan said the London-based bank is well-positioned against Chinese competitors.
“Many Chinese companies want to follow the ‘going out’ strategy and expand outside of China in the next few years, and their destinations fall into our footprints,” he said. “Chinese banks are still establishing their overseas presence, and it takes time to build such presence.”
Bank of China Ltd., based in Beijing, was the top-ranked underwriter of Dim Sum bonds from 2008 to 2010 before it was edged out of the top two positions by HSBC and Standard Chartered last year. HSBC accounted for almost a quarter of the market in 2011, followed by Standard Chartered’s 12 percent and BOC’s 10 percent, according to data compiled by Bloomberg.
Competition to manage those sales has escalated, with the number of underwriters from outside China and Hong Kong climbing to 26 last year, from two in 2009, the data show.
Sales of Dim Sum bonds, which began in 2007, surged four- fold last year, the data show. That growth has slowed this year -- with first-half sales climbing 22 percent from a year earlier to 98.2 billion yuan -- as investors demanded higher premiums from companies to compensate for the yuan depreciation.
Still, outstanding Dim Sum bonds may more than double to 500 billion yuan this year and climb to 1.3 trillion yuan in 2015, Deutsche Bank AG, the third-biggest underwriter for such debt last year, estimated in June.
“The FX market and Dim Sum bonds have developed a lot in the past two years,” said Ho of HSBC. “The next step will be the lending market.”
China’s Ministry of Commerce in October formalized rules for foreign direct investment using yuan raised offshore, accelerating demand for loans in the Chinese currency and opening a new arena for banks.
Yuan loans in Hong Kong increased to 30.8 billion yuan last year from 1.8 billion yuan in 2010, according to the Monetary Authority. They rose to 42 billion yuan at the end of the first quarter. Bank of Communications Co., China’s fifth-biggest lender, forecasts a rise to almost 60 billion yuan this year, said Xu Chengfa, deputy general manager of the Hong Kong branch.
China is relaxing rules that could allow Hong Kong banks to invest in stocks and bonds on the mainland using renminbi. It’s also granting more licenses to Hong Kong banks to get them to invest yuan in the mainland interbank-bond market.
Hong Kong, described by the city’s central banker Norman Chan as “the most comprehensive and competitive platform for offshore yuan business,” may face challenges from emerging yuan financial centers including London and Singapore, as well as Shanghai.
A plan published in January by China’s National Development and Reform Commission and the government of Shanghai in January said the Chinese city would become a global center for yuan trading by 2015, open markets wider to foreign investors and almost triple non-currency financial transactions.
Hong Kong is also taking steps to maintain its position as a hub for processing offshore-yuan payments. In June, policy makers extended operating hours for the yuan-related Real Time Gross Settlement system to 11:30 p.m. to make it more attractive for financial institutions around the world to settle payments through the city.
Singapore Exchange Ltd. plans to start listing securities denominated in the Chinese currency, it said in a statement on July 6. Meanwhile, London is pursuing more Chinese-currency trade and investment. HSBC in April managed the sale of 2 billion yuan of Dim Sum bonds in London, the city’s first.
“The next three years are crucial,” Standard Chartered’s Tan said. “If Hong Kong can make good use of this opportunity by ensuring a smooth sail, that will strengthen our position.”
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