CNH Tracker-Competition to intensify as Shanghai tussles for offshore yuan business
HONG KONG, Sept 5
HONG KONG, Sept 5 (Reuters) - Competition for offshore yuan business is set to intensify after Shanghai recently took an important step that is likely to chip away at Hong Kong's dominant position.
Hong Kong, which has deposit pool of nearly 700 billion yuan and about 80 percent market share of China's cross-border trade flows in yuan, will have to stay on top of its game to fend off the challenge from Shanghai, especially as the latter looks to introduce more favorable policies.
China's State Council in July approved the establishment of a free trade zone (FTZ) in the country's mainland financial center where yuan funds will be converted freely, while there are also signs that laws curbing foreign investment could be suspended.
Details of the FTZ will become more concrete after its official launch which according to local media is slated on Sept. 27.
"Hong Kong has been the offshore financial center for China in the past decades, and the launch of the Shanghai free trade zone will inevitably divert some business to Shanghai," Raymond Yeung, an analyst at ANZ said in a report.
The former British colony's leading position in yuan cross-border trade settlement could be eroded if more corporates move their treasury centers to Shanghai and rely on banks there to settle all the payments.
At its peak, more than 98 percent of China's trade settled in yuan was conducted by banks in Hong Kong. The average market share stood at 89 percent in 2012 though it started to fall since late last year to around 80 percent.
The drop in market share has been driven by yuan trading volumes moving to onshore correspondent banks handling cross-border settlements, and the emergence of offshore yuan hubs like Singapore.
While tax considerations have seen corporates, whose key business is in mainland China, set up offices in Hong Kong, they may have incentives to move to Shanghai if lower tax rates are offered.
To be sure, the impact on Hong Kong's yuan business is not likely to be immediate nor sizable given the appeal to foreign investors of Hong Kong's mature legal framework and transparent regulation.
Analysts expect the "redback" to be made fully convertible in the next three to five years, as Beijing is expediting reforms in the onshore market as well as rolling out policies to boost free flow of cross border yuan funds.
"The full convertibility of the yuan is long overdue," said Qu Hongbin, HSBC's chief economist.
Based on the experience of other countries, the capital account is usually convertible 5-7 years after the opening up of the current account which took effect in China in 1996, Qu said.
WEEK IN REVIEW:
* Banks in Hong Kong have started to offer higher deposit rates to retain yuan funds ahead of a likely cash squeeze in the run-up to a week-long holiday in China in early October.
* Yuan deposits in Hong Kong fell to 695 billion yuan in July, down 0.4 percent from a month earlier, the Hong Kong Monetary Authority said on Friday. Cross-border trade settled in yuan increased 5.4 percent to 285.4 billion yuan on a month-on-month basis.
* Long positions in the Chinese yuan increased to their most since early June, a sharp contrast to other Southeast Asian currencies where short positions hit the largest levels since the global financial crisis in 2008, a recent Reuters polled showed.
* Western Union Business Solutions said on Wednesday it had seen strong growth in direct Renminbi payments to China among its clients in the first half of 2013. Its American clients increased RMB payments by almost 90 percent during that period compared to a year earlier.
* Yuan deposits held by non-residents reached 1.07 trillion yuan in China by the end of June, of which 497 billion yuan was with foreign individuals, according to the State Administrative of Foreign Exchange (SAFE).
CHART OF THE WEEK:
Spread between onshore and offshore yuan spot rates widens recently: link.reuters.com/teg82v
Book runner: Proceeds (RMB mln): # of issues:
1.HSBC 37,453.1 110
2.Standard Chartered 19,994.9 61
3.BNP Paribas SA 16,971.8 55
4.ICBC 3,526.7 10
5.DBS Group 3,184.7 10
* Thomson Reuters data as of Sept.5.
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(Reporting by Michelle Chen; Editing by Shri Navaratnam)