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Hong Kong Monetary Authority

Banks nudge down yuan interest rates

PUBLISHED : Saturday, 16 June, 2012, 12:00am
UPDATED : Saturday, 16 June, 2012, 12:00am

Hong Kong banks began lowering yuan interest rates yesterday, after liquidity rose on the back of new measures introduced by the Hong Kong Monetary Authority (HKMA), the de facto central bank.

The HKMA launched a yuan liquidity facility yesterday to offer one-week yuan loans to local banks in exchange for collateral, such as government bonds.

The facility is regarded as a last resort for those seeking yuan funding in times of stress or market shocks.

The regulator also introduced a new liquidity-ratio requirement, which allows banks to classify more of their yuan assets as liquid.

The measures, which are aimed at boosting funding, are part of an effort to entrench Hong Kong's status as the leading international yuan trading centre.

Interest in investing in the currency has weakened in recent months due to a slowdown in appreciation.

The HKMA said it received queries from banks yesterday about using the liquidity facilities, but did not see a rush of banks tapping the credit line.

While the new yuan term funding will make it more palatable for banks to call on the HKMA for funds, banks could still prefer to borrow yuan on the interbank market funding, where rates were lower, economists said.

'I don't think local banks are particularly keen to seek help from the lender of the last resort. It's meant as a tool to mitigate a liquidity squeeze when people are starting to panic,' said Raymond Yeung, economist at ANZ Bank.

Some banks have started to lower yuan deposit rates for retail customers, because the relaxed liquidity requirement measures have freed up more cash to conduct business, including issuing loans.

Wing Lung Bank, for example, lowered yuan deposit interest rates by 10 to 15 basis points yesterday.

The lender's one-month yuan interest rate now stands at 1.8 to 1.9 per cent, and the three-month rate stands at 2.3 to 2.4 per cent.

'We want to see the market's reaction before deciding whether to further lower yuan interest rates,' said Frankie Kwong, treasurer of Wing Lung Bank, who added that they would still offer attractive prices for larger corporate clients. The yuan interbank offered rate by banks such as HSBC, Bank of China Hong Kong, and Standard Chartered Bank also dropped yesterday. The one-year rate fell about 20 basis points to 2.9 per cent.

But the lenders are unlikely to drastically cut yuan interest rates any time soon, as banks still need to compete for funding to support growth, said DBS China's Nathan Chow.

To further boost the city's role as an offshore yuan trading centre, Beijing is expected to announce further initiatives to coincide with the visit of President Hu Jintao to mark the 15th anniversary of the handover on July 1.

Potential new measures are likely to include increasing the daily cap of 20,000 yuan (HK$24,500) that individuals can convert, and lifting the ceiling of 80,000 yuan a day on remittances to the mainland, according to sources familiar with the matter.


Yuan deposits in the city have dipped for five straight months to this much at the end of April

- Down 12 per cent from November