UPDATE 1-Hong Kong set to take steps to boost offshore yuan market -sources

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By Victoria Bi

HONG KONG, June 14 (Reuters) - Hong Kong is set to announce measures to boost liquidity in the offshore yuan market, two sources with direct knowledge of the situation told Reuters on Thursday, after renminbi deposits at the city's banks fell for five months in a row.

The measures will include increasing the daily yuan conversion quota for Hong Kong residents from 20,000 yuan ($3,100) and raising their daily transfer quota to mainland Chinese banks from the current level of 80,000 yuan, the sources said.

Traders said the moves are likely to be incremental at best as corporate deposits are the key driver for offshore yuan business and not retail funds.

But they would underscore Hong Kong's commitment to Beijing's plan to use the financial centre as a test bed for its growing efforts to internationalise the yuan.

The Hong Kong Monetary Authority said it would hold a media briefing at 0830 GMT on new measures to enhance yuan liquidity, but a spokesperson said it was not related to residents' daily transfer quota to mainland banks.

Retail investors and companies have been drawn to the yuan and yuan-related investment products in recent years on expectations the Beijing would continue to let its currency appreciate against the U.S. dollar.

But retail interest has waned in recent months as the yuan weakened to near six-month lows.

At end-April, yuan deposits in Hong Kong banks were around 552 billion yuan ($87 billion), compared to a peak of 627 billion yuan in November, government data showed.

For a chart on Hong Kong yuan deposits, see link.reuters.com/nud68s

Institutional investors' interest has not shown similar signs of flagging. Yuan-denominated bond sales have kept growing at a robust pace.

After suffering a decline in the closing months of 2011, average monthly issuance of so-called "dim sum" bonds so far this month is a healthy 11.3 billion yuan compared to 8.5 billion yuan in the last quarter of 2011, Thomson Reuters data showed.

The Chinese currency's weakness in the offshore yuan market has lagged a fall in the non-deliverable forwards space because of a spreading cash squeeze in Hong Kong.

Among the reasons cited for the decline in yuan deposits in recent months are an increased pace of fund flows back into the mainland because of easier cross-border flows and the launch of various investment schemes such as RQFII.

The explosive growth in CNH funds was led by a landmark agreement between the HKMA and the People's Bank of China in July 2010.

Prior to that scheme, Hong Kong residents could convert their savings into 20,000 yuan daily. Between 2004 and early 2009, the share of yuan deposits in the Hong Kong banking system stagnated well below the 1 percentage point mark. ($1 = 6.3691 Chinese yuan) (Writing By Saikat Chatterjee; Editing by Kim Coghill)