By Michelle Chen
HONG KONG, Feb 6 The record surge in
cross-border yuan trade settlement may be glossing over an
uncomfortable truth -- arbitrage fund flows that seem to point
to other factors at play.
Arbitrage fund flows have been taking advantage of juicy
yields in the onshore market, and the trend is expected to
sustain given the chunky gap between the onshore and the
offshore yuan market rates.
The strong pickup in trade is partly due to a robust and
stable currency, which has led more foreign trading partners to
adopt the currency in their trade settlement systems.
Still, market players say there is a murkier side to this.
Bankers say some exporters and importers may have again
taken advantage of the different foreign exchange rates of the
yuan as well as interest rates in China and Hong Kong to lock in
profits via trade channels.
Fake invoices, value-inflated trade and arbitrage fund flows
in the disguise of trade transactions were also likely key
factors pushing up the yuan trade.
Trade settlement handled by Hong Kong banks increased 78
percent to 469.6 billion yuan ($77.49 billion) in December from
a year earlier, its highest since the scheme was launched nearly
five years ago, according to the latest statistics from the Hong
Kong Monetary authority (HKMA).
Round-tripping remains strong as Hong Kong's re-exports to
the mainland, which originated from the mainland, represents
nearly 50 percent of the city's total exports to China, ANZ said
in a report.
"The round-tripping trade has become an avenue to fuel
China's capital inflows. The current accounts could have been
improperly used as an alternative way of liquidity injection,"
said ANZ analysts.
A recent study by research group Global Financial Integrity
(GFI) revealed that $400 billion had flowed illicitly into China
from Hong Kong via trade misinvoicing between 2006 and the first
quarter of 2013.
The suspected arbitrage flows contributed to the heavy
capital inflows to the world's second-largest economy,
pressuring the Chinese currency higher and challenging the
government's efforts to tackle volatile flows.
Fund inflows to China may have then made their way into
bonds, stocks and wealth management products which provide more
attractive returns than their counterparts in overseas markets.
The HKMA told Reuters it had no comment on the yuan trade
Beijing still keeps a tight leash over its capital accounts
and it is difficult for foreign investors to tap onshore markets
except by way of some pilot schemes such as Qualified Foreign
Institutional Investor (QFII) and Renminbi QFII.
Investors' appetite in yuan assets was reflected in the
enthusiastic subscription to an RQFII product in January when a
Chinese money manager had to apply for new quota only two weeks
after it listed the first RQFII ETF in London.
The yield level in China and overseas markets has been kept
wide for some time. China's 10-year government bonds are quoted
at 4.55 percent, while the U.S. treasury bonds with the same
tenor yield at 2.66 percent.
A firmer yuan and higher interest rates could attract more
money inflows this year, and Beijing is considering a "Tobin
tax" on financial transactions to deter speculative capital
flows, an official at the State Administration of Foreign
Exchange (SAFE) said in January.
China's foreign exchange reserves, the world's largest, rose
$157 billion in the fourth quarter to $3.82 trillion at
WEEK IN REVIEW:
* E Fund Management (Hong Kong) said it was going to launch
an exchange-traded fund (ETF) tracking Citi Chinese Government
Bond 5-10 Years Index in early February. As of end-2013, the
yield to maturity for the index was 4.588 percent, according to
Citigroup Index LLC.
* Yuan deposits in Hong Kong rose to 860.5 billion yuan
($142.11 billion) in December, up 4.0 percent from a month
earlier, said the Hong Kong Monetary Authority. Cross-border
trade settled in yuan increased 6.9 percent to 469.6 billion
yuan on a month-on-month basis.
* Growth in China's services sector slowed to a five-year
low in January, an official survey showed, another sign of
stuttering momentum in the world's second-largest economy that
could deepen investors' concerns about emerging markets around
CHART OF THE WEEK:
RMB cross-border trade settlement handled by banks in Hong
Kong hit record high in December:RECENT STORIES:
CNH Tracker-China must chop down regulatory thicket to woo
ANALYSIS-China's yuan carry trade, an anchor and a risk for Asia
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THOMSON REUTERS SPEED GUIDES