HONG KONG Aug 14 South Korea, a latecomer to the offshore yuan business, is seeing strong growth in the sector despite recent volatility of the currency and uncertainties about China's economy.
Yuan deposits rose by $4.2 billion in July to $16.2 billion as foreign banks in South Korea ran campaigns to entice investors, central bank data showed on Friday.
It was the biggest monthly growth on record and also the 13th straight monthly gain, taking the yuan's market share to 25.9 percent of all foreign currency deposits, compared with 64.5 percent fpr dollar deposits.
The fast accumulation was mainly a result of Chinese banks tapping into Korean investors who are hungry for higher-yielding assets. The Chinese lenders then use the cheap funds in China's domestic market.
The strong trade relationship between the two countries and the growing number of Chinese visitors to South Korea have also contributed to the expansion of the yuan pool.
"It's very convenient to convert yuan to won now in Korea, and some big shops there even began to receive yuan payments when you buy goods there," said Daniel Chan, director at Brilliant & Bright Investment Consultancy in Hong Kong, who visited the country in July.
"Several years ago when I was there, I had to first convert the yuan to dollars and then to won. My feeling is that South Korea's interest in having more yuan reserves has been increasing over the past few years," Chan said.
In April 2012, the Bank of Korea announced it had been approved to purchase 20 billion yuan ($3.25 billion) worth of Chinese bonds and China's official Xinhua news agency reported in July that Korea had begun making purchases.
The country was assigned a yuan clearing bank in July this year and was granted an 80 billion yuan ($12.98 billion) quota to invest in the world's seocond-largest econmomy's capital markets.
With the quick growth of yuan deposits in South Korea, companies there have also started to switch some of their dollar settlements to the yuan as part of their global development strategies.
South Korea's yuan payments value in June rose more than six-fold from a year earlier, taking it to eighth position in the world for yuan payments excluding China and Hong Kong, according to global transaction services organisation SWIFT.
For the month, 68.9 percent of all direct payments between South Korea and China/Hong Kong were in yuan, up from 32.8 percent from the same period last year.
"Korea's increasing use of the RMB is indicative of the continued maturing of this important currency," said Martin Tricaud, CEO for HSBC Korea.
Despite the rapid growth in South Korea, an index that tracks the progress of yuan business activity in major offshore yuan hubs recorded the slowest growth in almost two years, reflecting concerns about a sharp selloff in the currency earlier this year and signs of weakness in China's economy.
The Standard Chartered Renminbi Globalisation Index reached 1,888 in June, up 0.3 percent from the previous months and 75.8 percent from a year eariler, but it was the slowest grwoth rate in 20 months.
WEEK IN REVIEW:
* Thes yuan is expected to change hands at 6.17 yuan a U.S. dollar in one month, 6.13 yuan in six months and 6.05 yuan in a year, a Reuters poll found last Friday, as markets expect its central bank to be more comfortable with a stronger currency as the economy recovers.
* Bank of China is set to raise more than 2 billion yuan in "Formosa" bonds issued in Taiwan and sold in Europe later in 2014 - the latest sign of warming financial ties across the Taiwan Strait, the Economic Daily said on Thursday.
* The amount of money flowing into China's economy slowed to the lowest level in nearly six years in July, adding to fears that a sustained recovery may be at risk in the second half of the year despite government efforts to shore up growth.
* The risk related to the exposure of Hong Kong banks to mainland China is controllable, the chief executive of the city's central bank said on Tuesday, playing down concerns the territory's ties with the mainland is making its financial system vulnerable.
CHART OF THE WEEK:
South Korea's yuan business sees strong momentum: link.reuters.com/mum62w
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(1 US dollar = 6.1613 Chinese yuan) (Editing by Kim Coghill)