* Yuan deposits rise to record high for 10th month
* Yuan deposits expected to rise in April
* Risk from possible China bank default seen as minimal (Adds c.bank official comment, background, inspection)
By Christine Kim
SEOUL, April 11 (Reuters) - Yuan deposits at banks in South Korea rose to a record high for a 10th month in March, central bank data showed on Friday, and are expected to keep rising as higher yields in China continue to attract South Korean investors.
Deposits denominated in the Chinese yuan rose $270 million to a record $7.9 billion at the end of March while foreign exchange deposits shrank last month.
The Bank of Korea data showed foreign exchange deposits at foreign banks in the country rose $1.7 billion in March to $15 billion, mainly due to the increase in yuan holdings. However, foreign exchange deposits at local banks fell $3.2 billion to $36.2 billion.
A central bank official said yuan deposits were expected to maintain their rising streak in April after media reports said the country’s financial authorities decided foreign banks would be allowed once again to manage yuan deposits “freely.”
“In order for South Korea to be affected, there has to be a problem in Chinese banks, but for that to happen, it means something in China’s economy has to go wrong, like a national default,” the official said.
“But chances of that happening are very low.”
The Bank of Korea’s new governor Lee Ju-yeol told his first policy press conference on Thursday that the central bank was not yet worried over economic conditions in China, but was keeping a close eye on the situation there.
South Korean financial authorities in January had sent a warning to Chinese banks located in South Korea to refrain from increasing their yuan deposits after a rapid build-up of yuan deposits last year sparked concern among regulators.
The decision to rescind the warning came after a rare inspection of Chinese banks carried out by the Bank of Korea and Financial Supervisory Service that ended on March 28. The official results have yet to be made public, which could take months.
The yuan holdings account for only 15.4 percent of all foreign currency deposits in South Korea as of end-March, and the total pales in comparison with about $144 billion worth of such deposits in Hong Kong at end-January or the $32 billion held in Singapore at end-2013.
Meanwhile, foreign exchange deposits in all banks in South Korea slipped $1.6 billion to $51.1 billion at end-March, compared with $52.7 billion at end-February as companies paid off import accounts and foreign currency debt. (Editing by Jacqueline Wong)