HONG KONG, April 10 (Reuters) - Banks in Hong Kong are now offering higher interest rates than their mainland cousins on new renminbi (RMB) currency deposits as the recent sharp fall in the Chinese currency dampened investor interest in holding Chinese assets.
These aggressive measures will help bolster the offshore yuan liquidity pool which is under pressure from the weakness of the "redback" and the emergence of more offshore yuan centres.
With HSBC and Bank of China Hong Kong, the two biggest banks involved in the offshore yuan business, leading the way in raising deposit rates, smaller banks are likely to follow suit, enhancing the allure of holding Chinese currency deposits.
HSBC, a leading bank in underwriting offshore yuan bonds, is providing an annual return as high as 3.8 percent for one-month yuan deposits with a minimum deposit amount of only 20,000 yuan ($3,200), the bank told Reuters.
In comparison, Hong Kong dollar deposits for the same period yield just a few basis points.
A few blocks away, Bank of China Hong Kong, the clearing bank for all renminbi-related transactions in the city, is offering a return of 3.15 percent for three-month yuan deposits, according to a spokesperson at the bank.
That compares with an interest rate of 2.6 percent for a three-month yuan deposit in China, the shortest tenor for a time deposit offered by the central bank, and 3.75 percent for a two-year yuan deposit.
The competitive rates offered by Hong Kong banks may see a rush by local residents and some companies to convert their foreign currency deposits in Hong Kong into renminbi, further boosting the 920 billion yuan ($148 billion) pool in Hong Kong.
"Yuan liquidity in the interbank market is not tight at present, so I think banks are aiming to win back clients who switched yuan holdings to other currencies recently," said Ngan Kim Man, head of RMB business strategy and planning at Hang Seng Bank.
The bank is offering an annualised interest rate of 6.38 percent for yuan deposits with a tenor of seven days.
Lenders such as Dah Sing Bank, Citic Bank International, Standard Chartered and Citi are also offering interest rates not lower than 3 percent for yuan deposits in Hong Kong.
The yuan has lost 2.4 percent against the dollar year to date, wiping out almost all the gains it saw in 2013. Some analysts expect mild gains from current levels.
Analysts say banks offering high returns for short tenors are betting that investors won't move yuan funds out of their banks even when the favourable term rates end.
Banks now have more ways to invest their yuan funds as China facilitates cross-border fund movements and more yuan products become available in Hong Kong. Typical usage include trade finance, loans and dim sum bond investments.
Renminbi deposits constituted more than 12 percent of the HK$9.33 trillion deposit pool in Hong Kong in February, higher than 9.7 percent a year earlier, but still much lower than the U.S. dollar's 30 percent, according to data from the Hong Kong Monetary Authority.
To be sure, market watchers are not expecting an avalanche of mainland investors rushing to put their money in Hong Kong's banks due to cross-border transfer limits and higher yields available from wealth management products on the mainland.
However, some banks are betting that local investors who put yuan funds in mainland banks when interest rates in China were much higher will move them back to the city, boosting Hong Kong's renminbi deposit base which is facing stiff competition from other offshore yuan centers such as Taiwan and Singapore.
A cautious attitude toward the "redback" will keep yuan interest rates elevated for some time in Hong Kong, although upside room is limited given the tightening profit margins of yuan trade finance and lending business as competition intensifies.
Bankers say annual returns on yuan loans could be around 4 percent for Hong Kong banks, which is already quite close to their funding cost at more than 3 percent. In comparison, net interest margins for banks in China can easily reach 3 percentage points. ($1 = 6.2005 Chinese Yuan) (Editing by Saikat Chatterjee and Eric Meijer)