CNH Tracker-Offshore yuan deposits to pick up despite hiccups in Hong Kong

HONG KONG, July 3 Thu Jul 3, 2014 12:35am EDT

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HONG KONG, July 3 (Reuters) - Yuan deposits in the world's biggest offshore yuan centre declined for the first time in almost a year in May as an extended spell of weakness in the Chinese currency sapped corporate appetite to bring the renminbi into Hong Kong.

While the decline was marginal after years of double-digit rates of growth in yuan deposits in the city's banks, the fall comes as investors' appetite for holding the renminbi has waned amid recent volatility and as other cities push forward with their own plans to become offshore hubs.

Hong Kong's yuan deposits fell to 955.8 billion yuan ($153.85 billion) in May, down 0.4 percent from a month earlier, the city's de-facto central bank said on Monday. It was the first monthly drop since July last year.

The decline was likely mainly a result of shrinking premiums for the offshore yuan spot rate over its onshore counterpart, dampening Chinese corporates' appetite to convert the yuan to dollars in Hong Kong.

After displaying a premium of almost 400 pips over the CNY at the beginning of the year, the CNH has moved in lock-step with the onshore yuan more recently and even showed a discount of 20 pips on Thursday.

The difference between the two market rates offers arbitrage opportunities for corporates since they can choose a better rate to buy dollars. Corporate fund flows account for about 70 percent of yuan deposits in Hong Kong.

The sharp weakness of the yuan orchestrated by the People's Bank of China (PBOC) in the past few months to shake out speculative money has also dimmed the currency's investment appeal, prompting some investors to switch their yuan deposits to Hong Kong dollar deposits.

"Investors are becoming more hesitant when they make yuan deposits as the appreciation expectation of the currency has cooled down, leading to less new funds flowing to the yuan," said Nathan Chow, an analyst at DBS bank in Hong Kong.

While the yuan has shown signs of stabilising recently after a fall of more than 3 percent earlier in the year, traders are unsure when the central bank will allow it to resume its previous gradual appreciation pace.

In contrast to the decline in yuan deposits, the Hong Kong dollar deposits rose by HK$78.8 billion ($10.17 billion) in May from a month earlier and its market share also increased from 48.4 percent to 48.6 percent.

However, market watchers said the modest shift was likely temporary and was unlikely to pose a barrier to the fast global expansion of the "redback" as Beijing continues to open its domestic market as well as channels where foreign investors can obtain its currency.

Both Luxembourg and France announced on Sunday their central banks had signed memorandums of understanding (MoU) with the PBOC to set up yuan payment systems to facilitate cross-border trade transactions.

The announcements came on the heels of the yuan clearing banks assigned in London and Frankfurt in June.

Russia's central bank governor also said that Russia and China were close to reaching an agreement on conducting swap operations in roubles and yuan to enhance bilateral trade.

The country's top natural gas producer Gazprom is preparing to get payments in the yuan currency for sales to China, its Chief Financial Officer Andrei Kruglov said.

WEEK IN REVIEW:

* China will permit banks to set their own exchange rates for the yuan against the dollar in deals with clients, in a further step to relax controls to make the currency more market-driven.

* South Korea President Park Geun-hye will sign an agreement this week with her Chinese counterpart to establish a won-yuan direct transaction market, the country's presidential Blue House said on Wednesday.

* J.P. Morgan Asset Management said a share class hedged to the renminbi was being launched for its Asian Total Return Bond Fund. The bank launched an RMB-hedged share class for Asia Equity Dividend Fund and Multi Income Fund earlier this year.

* Cross-border trade settled in yuan fell 3.8 percent in May to 444 billion yuan on a month-on-month basis, the Hong Kong Monetary Authority said on Monday.

* Yuan deposits in Singapore rose to 220 billion yuan ($35.43 billion) at the end of March, up 13 percent from the end of last year, according to statistics from the Monetary Authority of Singapore.

CHART OF THE WEEK:

Hong Kong's yuan deposits fell in May: link.reuters.com/mav32w

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($1 = 7.7503 Hong Kong Dollars) ($1 = 6.2126 Chinese Yuan Renminbi) (Editing by Kim Coghill)

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