LI, Tao @ Hong Kong

Hong Kong may introduce measures to slow growth in the city’s yuan deposits to help stem an exodus of local currency from the financial system, analysts have said.

The city’s policy makers may try “tapping the brake as the surge in deposits is bothering; everything is happening so fast,” Paul Schulte, global head of financial strategy at CCB International, the Hong Kong-based brokerage arm of China’s second-largest bank, told Bloomberg in an interview on May 18.

“If you don’t slow down the yuan conversion, the liquidity in Hong Kong will continue to dry up and that’s a problem for the banking system,” said Schulte.

Hong Kong’s yuan offshore business has been developing rapidly in recent years, with total yuan deposits reaching 451.4 billion yuan by the end of March, more than triple that of 149.3 billion yuan at the end of September 2010, according to data from the city’s de facto central bank, the Hong Kong Monetary Authority (HKMA).

The local currency loan-to-deposit ratio for Hong Kong banks rose to 81.7 percent for the same period, from 71 percent in early 2010, HKMA said.

Hong Kong banks are now facing “upward” pressure on lending and deposit rates as credit demand soaks up cash from the financial system, HKMA Chief Executive Norman Chan said earlier this week, adding that the authority may also ask some banks to set aside more reserves after borrowing surged and mortgage rates advanced.

Citing a recent strategy note from locally based brokerage CSLA, a Dow Jones Market Watch commentary on May 15 said city banks may face a liquidity shortage in terms of Hong Kong dollars, which in theory could push up lending costs.

“Longer term, there is also potential for a growing currency mismatch if banks keep taking in yuan deposits but can only lend in Hong Kong or US dollars,” said the comment.

The city’s government may lower the current yuan purchase quota of 20,000 yuan a day for individual investors to stem the expansion of yuan deposits, which now account for 8 percent of total funds placed with banks in the city, Schulte said.

Donna Kwok, Greater China economist from HSBC, said that she believes a faster pace of growth in yuan deposits would not necessarily translate directly into lower demand for the local currency as deposit holders could just as easily move out of other foreign currencies – such as the US dollar – into yuan as well.

“We think yuan deposits are actually growing at a pace in line with our expectations – for the purposes of cultivating balanced growth in the Chinese market,” Kwok told China Daily. “The issue is still whether yuan deposits are growing ‘fast enough’, as opposed to ‘too fast’.”

In late April, the yuan breezed past 6.50 per US dollar for the first time since 1993. Its continuous appreciation against the US dollar has drawn investors to favor the currency and yuan-denominated products.

However, since its debut on April 29, Li Ka-shing’s Hui Xian Real Estate Investment Trust has performed poorly. The city’s first yuan-denominated initial public offering closed at 4.60 yuan on Friday, meaning it has now slumped 12.3 percent compared with its IPO price of 5.24 yuan.

Bloomberg contributed to this story.

China Daily

(HK Edition 05/21/2011 page2)

http://www.chinadaily.com.cn/hkedition/2011-05/21/content_12552635.htm