HONG KONG, Sept 3 (Reuters) - 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.
Already faced with a scarcity of yuan funds in the former British colony due to stagnant growth in deposits and more channels to invest offshore yuan in the mainland markets, the upcoming holidays are only expected to worsen conditions.
The offshore yuan clearing bank, Bank of China Hong Kong , said it had raised its preferential interest rate for one-month new yuan funds above 20,000 yuan ($3,300) by 20 basis points to 2 percent until Sept. 14.
The Hong Kong branch of Bank of Communications is also offering a preferential deposit rate of 3.4 percent for 6-month and 9-month yuan funds above 5 million yuan from Monday. For funds above 500,000 and 50,000 yuan, the rates are 3.2 and 3 percent, respectively.
The interest rates already surpass the onshore one-year benchmark yuan deposit rate at 3 percent, which can be increased by 30 basis points.
“Banks have learned the experience from the sharp rise of money market rates last September, so they make preparations earlier this year to meet fund needs toward quarter-end and ahead of long holidays,” said Raymond Yeung, an analyst at ANZ.
Last year, the overnight lending rate sought by some brokers briefly jumped to as high as 7 percent at the end of September as lenders were short of yuan funds.
China’s National Day Holiday stretches from Oct. 1 to 7.
The offshore yuan deposit pool has stagnated and even shrunk for two consecutive months as increased yuan repatriation via programmes such as the Renminbi Qualified Foreign Institutional Investor (RQFII) led to tighter liquidity.
Latest figures from the Hong Kong Monetary Authority showed yuan deposits declined slightly to 695 billion yuan ($113.57 billion) in July.
Market analysts expect the total pool of yuan deposits to be around 700 billion yuan at the end of 2013 compared with the double-digit rates of growth in the past.
$1 = 6.1196 Chinese yuan Reporting by Michelle Chen; Editing by Jacqueline Wong