May 12, 2014 / 3:01 AM / 3 years ago

South Korea yuan bank deposits rise to new record in April

SEOUL, May 12 (Reuters) - Yuan deposits at banks in South Korea rose by an equivalent $2.0 billion during April to hit a record $9.9 billion, official data showed on Monday, as investors continued to favour the yuan’s higher interest rate.

It was the third-largest monthly gain on record in the yuan deposits in South Korea, which have risen fast from late last year mainly to earn higher returns from yuan assets, South Korea central bank data showed.

A Bank of Korea official said the rise in yuan deposits was expected to continue for the time being as yuan deposits still offered at least 50 basis points higher return than won deposits, although it gave no further details.

Media reports said last month that financial authorities in South Korea had lifted their warning on banks to refrain from increasing their yuan deposits, although there has been no official announcement on the matter.

What makes yuan deposits in Seoul different from those in Singapore or London is that the won cannot be directly converted to yuan, making yuan deposit transactions there complicated.

Yuan deposits in Seoul were built through a structured product scheme in which a local brokerage sold asset-backed commercial paper to raise won from local institutions such as insurance companies.

The proceeds were then swapped into dollars, before they were converted to yuan and deposited with the local subsidiaries of Chinese banks, which then send the money back to China to fund their operations there.

The Bank of Korea data showed all deposits in foreign currencies including yuan rose by a net $7.3 billion during April to reach a record $58.4 billion, the biggest monthly gain since early 2007, he said.

More than half of the monthly gain came from deposits in U.S. dollars, which rose by a net $4.8 billion to $42.5 billion on increased deposits by companies for settlement of trade bills, the data showed.

As of the end of April, U.S. dollar-denominated deposits accounted for 72.7 percent of the total and yuan deposits for 17.0 percent, the data showed. (Reporting by Christine Kim; Editing by Choonsik Yoo and Eric Meijer)

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