Hong Kong Yuan Deposits Snap Eight-Month Increase on Cash Crunch

Yuan deposits in Hong Kong fell for the first time in nine months on concern China’s worst cash crunch in at least a decade will hurt economic growth.

Savings dropped by 522 million yuan ($85.2 million) to 698 billion yuan in June from a month earlier, the Hong Kong Monetary Authority said in a statement today. That’s the first monthly decline since September 2012. Hong Kong handled 271 billion yuan of trade settled in the Chinese currency last month, a 15 percent decrease from May, data from HKMA show.

Premier Li Keqiang engineered a stress test in June to contain banking risks, leading to a surge in benchmark money-market rates to a record. China said in May it will increase scrutiny of cross-border capital flows by importers and exporters to prevent speculative funds from entering the country disguised as payments for trade.

“The interbank liquidity stress has somehow harmed market sentiment,” said Kelvin Lau, Hong Kong-based senior economist at Standard Chartered Plc. “Expectations on yuan appreciation have declined with rising concerns over China’s growth. Cross-border trade flows have also become more balanced than before, meaning less net gains in the yuan pool in Hong Kong.”

Non-deliverable yuan forwards due in a year were heading for a third monthly decline, the longest stretch since May last year. China’s Purchasing Managers’ Index for manufacturing was at 49.8 for July, below the 50 level that divides expansion and contraction, according to the median estimate in a Bloomberg survey before data due tomorrow.

Recent visits to clients in China reveal deterioration of confidence and rising expectations of yuan depreciation this quarter and in years to come, Credit Agricole CIB strategists Dariusz Kowalczyk and Gary Yau wrote in a research note today. China’s exports unexpectedly fell 3.1 percent in June, the first decline since January 2012, the government reported July 10.

Standard Chartered expects Hong Kong’s yuan deposit growth to slow in the second half as investors continue to scale back bets on currency appreciation, said Lau.

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