The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Yuan loses lustre for retail investors
Yuan deposits from retail depositors fell for the fourth consecutive month in March, but the Hong Kong Monetary Authority said professional investors were still big buyers of yuan certificates of deposit (CDs).
Yuan deposits in the city fell by 2.1 per cent month-on-month to 554.3 billion yuan (HK$679 billion) as of March 31. This is down 5.8 per cent from the 588.5 billion yuan in total deposits as of December of last year, and 13.17 per cent lower than the 627.3 billion yuan peak recorded on November 30, HKMA figures show.
It is also the fourth consecutive monthly fall, which bankers said signalled that the currency was out of favour with retail investors who were less confident it would continue to gain against the US dollar this year.
But while retail yuan deposits are falling, the deposit pool from institutional investors who bought yuan CDs has been steadily rising over the past three months. CDs are issued by banks to raise money from professional investors and large depositors attracted by the yield, which is generally higher than yuan-denominated retail deposit accounts.
The amount of outstanding yuan CDs stood at 118.1 billion yuan on March 31, up from 73.1 billion yuan in December of last year, offsetting the fall in retail deposits.
Total yuan deposits, including customer yuan accounts and outstanding CDs, stood at 672.4 billion yuan on March 31, up 1.63 per cent from 661.6 billion yuan in December.
While the mainland's capital account remains closed, it has gradually relaxed its currency rules since July 2009 to allow yuan be used to settle trades and for investing in insurance, funds and other foreign exchange products. Over the past two years, yuan products and yuan deposits have ballooned as investors bet that the yuan would continue to gain against the US dollar. The yuan has risen more than 30 per cent against the US dollar since 2004, and gained 4.7 per cent last year.
However, this year, many bankers expect the yuan to be flat or post only modest growth against the dollar because of slowing economic growth in China, whose economy is forecast to grow by 7.5 per cent this year against about 8 per cent in recent years.
Chan Tze-ching, senior adviser at the Bank of East Asia, said the yuan would not rise sharply against the US dollar this year, but was confident in the long term for yuan deposits.
'China is in the process of internationalising the yuan,' Chan said. 'Its economic growth is also on a long-term rising trend, and the country wants a stronger yuan to lower the cost of imports. This supports the yuan's long-term prospects.''
Hong Kong is competing with other markets as an offshore yuan trading centre. Both Singapore and London are keen to expand their yuan business, and yuan deposits in London recently stood at about 100 billion.
The HKMA said the yuan trade was also rising, with total yuan-denominated cross-border trade settlement totalling 227.3 billion yuan at the end of last month, up from 187.5 billion yuan in the previous month.