By Se Young Lee and Michelle Chen
HONG KONG/SEOUL, March 6 Deposits denominated in
the Chinese currency have exploded in South Korea as local
subsidiaries of Chinese banks tap into Korean investors' hunger
for higher-yielding assets.
It has also opened a channel for the Chinese lenders to
raise cheap yuan funds and use them in their domestic market to
extend loans, enjoying fat margins amid the backdrop of tight
monetary conditions in the world's second-largest economy.
The fast pick-up of yuan deposits in Seoul has left market
participants wondering if the yuan pool there will exceed that
in more established centres such as Singapore and London,
despite a dramatic slump in the "redback" in the past two weeks.
Yuan deposits by local residents in South Korea stood at the
equivalent of $7.56 billion at end-January, more than eight
times that at end-September, data from its central bank showed.
That amount is already quite competitive compared to London,
which saw yuan deposits from personal and corporate accounts
only at 3.1 billion yuan ($504.64 million) at the end of last
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
The proceeds were then swapped into dollars, before they
were converted to yuan and put in local subsidiaries of Chinese
banks, which then send the money back to China to fund their
These structured products generate an annual return in the
low 3 percent range, better than won deposit products which
usually offer returns in the high 2 percent range, according to
bankers in South Korea.
"The Chinese banks will send the money back to their
headquarters," said a Bank of Korea official who spoke on
condition of anonymity because he was not authorised to talk to
"I understand there is an increase in higher-rate loans in
China due to a shortage of funds, so the Chinese banks end up
with a substantial margin even if they offer comparatively
higher interest rates on deposits in Korea," the official said.
China's central bank is expected to keep a relatively tight
monetary stance after two cash squeezes it engineered last year
to discourage banks from riskier lending. Funding costs on the
mainland also face upward pressure as Beijing accelerates
reforms in the domestic financial market.
Analysts say demand for yuan products in Seoul is likely to
be sustained, given favourable currency swap rates will continue
to bring returns from these products, but the pace may be slow
as regulators have expressed concern about the rapid growth.
The Financial Supervisory Service, a South Korean financial
regulator, already instructed Chinese bank branches in Korea to
slow their yuan deposit-building late last year. But officials
say that any change in regulation or new rules in response to
the yuan deposit growth are unlikely at present.
FAVORABLE SWAP RATES
The yuan was a regional bright spot last year,
gaining nearly 3 percent against the dollar, outperforming most
of its emerging market peers.
But it has retreated sharply in recent weeks, with the
central bank believed to be punishing speculators who are making
one-way appreciation bets on the currency.
Still, most analysts believe its long-term appreciation
trend remains intact as Beijing encourages broader international
usage of the currency to rival the dollar.
Greater volatility is unlikely to affect the enthusiasm for
yuan-structured products sold in South Korea, as foreign
exchange rate risks have already been hedged by cross currency
swaps (CCS), analysts say.
Moreover, they believe the low level of dollar/yuan CCS
rates at present will boost sales of yuan deposit products in
"Right now investors can get a hedge premium on the
dollar/won swap, and a cost on the dollar/yuan swap. But the
premium from the dollar/won side outweighs the costs," said a
banker in South Korea.
Investors who buy one-year yuan deposit products and swap
them to the won can enjoy a yield pick-up of about 90 basis
points (bps) over conventional won deposits, while the pick-up
was non-exist half a year ago, said Becky Liu, a strategist at
Standard Chartered Bank in Hong Kong.
"The current favourable swap levels could benefit a
continuing strong demand by local investors to pick up the
additional return," Liu said.