UPDATE 1-China c.bank to lift HK yuan clearing interest rate - sources

Tue Mar 22, 2011 4:12am EDT

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By Victoria Bi and Michelle Chen

HONG KONG, March 22 (Reuters) - China's central bank plans to increase yuan clearing interest rates in Hong Kong to boost the development of the territory's yuan offshore market, sending yields briefly higher, sources said.     The sources told Reuters that the central bank was discussing with banks the likelihood of revising deposit rates paid on offshore yuan deposits upwards, to align them closer with mainland deposit rates.     Higher interest rates would boost the attractiveness of yuan-denominated deposits, encourage the introduction of more yuan products and increase usage of the yuan in the offshore market .     "The central bank is discussing details with banks and there will be an increase in interest rates, although it unlikely to lift rates to as high as levels in China in one go," a source told Reuters.     The news sent yields on yuan bonds in Hong Kong, or "dim sum" bonds as they are more colourfully known, briefly higher by 2-5 basis points, in a thin market as markets grappled with the prospect of higher interest rates in the near term.     Yuan circulation in Hong Kong has risen rapidly since China lifted controls on the currency in the territory last July. Yuan deposits quadrupled to 370.6 billion yuan in January from a year earlier.     But interest in using yuan assets in the offshore market have slowed somewhat after an initial surge, with investors complaining about the lack of investment products and relatively lower interest rates compared with the mainland.           The People's Bank of China's one-year deposit benchmark rate is at 3.0 percent.     The sole clearing bank in Hong Kong, BOC Hong Kong (Holdings) Ltd is paid an annual interest rate of 0.99 percent by the PBOC for excess yuan it deposits with PBOC's Shenzhen branch after clearing.     BOCHK then pays 0.865 percent to banks in Hong Kong for the yuan they deposit with it after charges and fees. These banks then offer yuan deposit rates of between 0.4 and 0.6 percent to customers, barely higher than Hong Kong dollar deposit rates, which are virtually zero.     Higher rates paid on yuan deposits would also encourage companies to leave their yuan in the offshore market rather than try to remit it to the mainland, a Hong Kong-based banker said.     The move would also boost the supply of bonds as investors hope for higher yields on forthcoming issues. Issuers have lined up to sell yuan bonds in the territory, attracted by feverish demand for yuan assets and as the increase in deposits has outpaced asset growth by a big margin.     Total outstanding bonds within the territory stands at about 80 billion yuan ($12.19 billion)and RBS has forecast net new issuance of yuan bonds at 120 billion yuan in 2011 alone. ($1 = 6.565 Chinese Renminbis) (Additional reporting by Alison Leung; Writing by Saikat Chatterjee; Editing by Chris Lewis)

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