Why Hong Kong Banks Are Yearning for the Yuan

Competition for customers as China loosens monetary controls
Offshore trade handled in yuan by Hong Kong banks in the first quarter: $90 billion Illustration by Topos Graphics

Leo Lo, co-founder of a Hong Kong clothing maker whose customers have included Baby Dior, says he was surprised when five senior bankers visited his office this year in an industrial district of Kowloon offering to buy him lunch. Last year companies such as his Wenlo’s Apparel Manufacturer had to chase after lower-level executives—and meals usually went on clients’ tabs, he says. 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,” says Lo, who rejected entreaties from Citigroup, Hang Seng Bank, and Standard Chartered Bank and decided to stick with his three current banks, which he declined to name. “They’re getting ready for the race. They know that renminbi is their future.”

The yuan may become one of the world’s top three global-trade currencies in the next five years, according to a report by HSBC Holdings, which estimated that as much as 50 percent of China’s trade may be settled in the currency by 2015, up from 10 percent in the first quarter of this year. Banks in Hong Kong managed 571.2 billion yuan ($90 billion) in offshore trade in the first quarter, up from less than 50 billion yuan two years ago, according to the Hong Kong Monetary Authority.

China pledged in a five-year plan running through 2015 to keep loosening controls on the yuan as it seeks to encourage wider use of the currency in international markets. In 2009 it began to allow companies to settle cross-border trade in yuan. In April, China’s central bank said the yuan could move as much as 1 percent up or down against the dollar each day—from a rate that it sets daily—up from 0.5 percent.

The looser rules have made banks in Hong Kong, which uses its own currency, eager to compete for yuan business. Along with courting companies, they’re raising interest rates to attract yuan deposits, boosting underwriting of yuan bonds, increasing lending, and creating investment products. “When the market first emerged, banks were testing the water only, but they are more aggressive now,” says Ivan Li, deputy head of research at Kim Eng Securities Hong Kong.

A large number of banks have hired employees in Hong Kong or relocated them there 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, according to Louisa Wong, executive chairman of executive-search firm Bó Lè Associates.

Sales of so-called dim sum bonds, or yuan-denominated notes issued in Hong Kong by companies to fund expenses and expansion in China, are forecast to more than double to 300 billion yuan this year. 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. Dim sum loans may also double to 60 billion yuan as firms seek to tap lower borrowing costs in Hong Kong to pay for manufacturing expenses in the mainland.

Savings in yuan in Hong Kong climbed to about 563 billion yuan at the end of July, up more than 24-fold since 2006. They may reach 1.5 trillion yuan by 2015, estimated Australia and New Zealand Banking Group in June. To attract yuan savings, HSBC raised the cap of its promotional 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 spokeswoman Yvonne Chuang. Standard Chartered increased its three-month rate three times, to 2.5 percent, according to spokeswoman Joyce Li.

Over the past year Sitoy Group Holdings of Hong Kong, which makes handbags for Coach and Prada in China, was approached by more than five banks interested in handling its deposits, says Chief Financial Officer Yu Chun Kau. “Most of them didn’t have a relationship with us before,” he says, adding that they sought to sell tailor-made yuan trade-settlement services and better rates for corporate deposits. “Without deposits, banks won’t have the firepower to lend,” Li at Kim Eng Securities says.

Offering services in yuan “is a growing business,” says Alex Cheung, managing director of institutional banking for Singapore-based DBS Group Holdings in Hong Kong, whose yuan business contributed 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.”

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