| HONG KONG, June 5
HONG KONG, June 5 The narrowing spread of yuan
foreign exchange rates in mainland China and Hong Kong has taken
a toll on the expansion of the Chinese currency offshore and led
to a slowdown in the growth of deposits.
Yuan deposits in the former British colony rose to 959.9
billion yuan ($153.5 billion) in April, up 15 billion yuan from
a month earlier, the smallest monthly increase in eight months,
data from the Hong Kong Monetary Authority (HKMA) showed.
It comes at a time when the onshore and offshore yuan/dollar
gap has almost disappeared and offshore yuan even trades at a
discount to its onshore counterpart, after commanding big
premiums at the beginning of the year.
The difference between the two market rates usually offers
arbitrage opportunities for corporates since they can choose a
better rate to buy or sell dollars. The larger the spread, the
more incentives companies have to find a more favorable market
to conduct currency exchange.
Before the yuan's sharp fall earlier this year, its steady
appreciation had made the offshore rate stronger than its
onshore counterpart, leading to continuous outflows of yuan
funds to Hong Kong and a rapid accumulation of yuan deposits
However, corporate enthusiasm to bring the yuan to markets
abroad has been dampened since April, after sentiment toward the
currency turned weaker and offshore yuan rates began to move in
lock step with those onshore.
China's central bank engineered two phases of weakness in
the yuan in February and April to deter speculative one-way
appreciation bets on the currency.
"In the near term, we could see a slowdown of offshore
deposit accumulation due to a decline in CNH premium," said
Becky Liu, a senior strategist at Standard Chartered Bank in
The yuan is experiencing its most sustained depreciation
since the 2005 landmark revaluation. It has lost 3.2 percent
against the dollar year to date, wiping out all its gains in
2013 and becoming the worst performer in Asia.
The adverse impact of a weak yuan on the offshore pool is
likely to be short-lived, however, as the Chinese currency is
expected to regain strength later this year and more channels
are set to be opened up to allow yuan outflows.
A pilot scheme called Shanghai-Hong Kong stock connect that
allows investors in the two cities to invest in each other's
stock markets and requires trade to be settled in yuan will be
implemented in October.
Though analysts are divided on which of the two markets is
more attractive in terms of valuation, the Hong Kong market's
far better liquidity and transparent regulation will no doubt
appeal to mainland investors and attract yuan funds.
Meanwhile, increasing use of the yuan by both Chinese and
multinational companies in trade settlement also bodes well for
long-term growth of yuan deposits overseas.
"From our conversations with clients, we know that many
multinational companies and most larger companies in the Greater
China region are really past the understanding phase. They are
asking 'how' rather than 'why' and are ready to take some real
actions," said Michael Vrontamitis, regional head of product
management at Standard Chartered Bank.
WEEK IN REVIEW:
* China's State Administration of Foreign Exchange (SAFE)
gave 2 billion yuan in quota to BlackRock Asset management North
Asia Limited under the renminbi Qualified Foreign Institutional
Investor (RQFII) scheme. The total granted RQFII quota amounted
to 238.2 billion yuan at the end of May.
* Hong Kong's dim sum bond market is robust and issuance in
the first four months of this year has accounted for more than
70 percent of the total in 2013, said Yuen Cheuk Bun, head of
fixed income at Bank of China Hong Kong Asset management, adding
demand from European and Middle East investors is picking up.
* Yuan deposits in Hong Kong rose to 959.9 billion yuan in
April, up 1.6 percent from a month earlier, the Hong Kong
Monetary Authority said on Friday. Cross-border trade settled in
yuan fell 23.4 percent to 461.5 billion yuan on a month-on-month
* China's central bank said on Friday that it had used 2.4
million yuan of a facility under its currency swap deal with
Bank of Korea for trade financing, the first time it tapped such
CHART OF THE WEEK:
Hong Kong's yuan deposits and trade settlement: link.reuters.com/gyb89v
CNH Tracker-Offshore yuan loans to pick up on weak currency,
China's leading brokerages set for new dawn in Hong Kong
More stories about the CNH market
Daily onshore yuan reports
Daily China money market reports
Offshore yuan rate Onshore yuan rate
Offshore yuan dealt Onshore yuan on CFETS
THOMSON REUTERS SPEED GUIDES
($1 = 6.2541 Chinese yuan)
(Editing by Jacqueline Wong)