Hong Kong’s yuan hub role no longer looks like such a good idea

PUBLISHED : Thursday, 07 January, 2016, 9:24pm
UPDATED : Thursday, 07 January, 2016, 9:24pm

A downward trending yuan is likely to hurt Hong Kong’s role as a hub for offshore trading of the Chinese currency, as depreciation weighs negatively on yuan deposits while financial companies

find it harder to sell yuan-denominated products.

Against the US dollar, the yuan has lose 2 per cent of its value in the past four trading days, and is down about 7.4 per cent in the past six months.

Some analysts expect the currency to fall another 10 per cent this year, adding to its 5.3 per cent drop in 2015, owing to concerns over China’s slowing economy and less intervention by the People’s Bank of China.

Once viewed as a safe-haven for its steady appreciation against the US dollar, indications are that savers are beginning to abandon hope in the currency. The value of yuan deposits held at Hong Kong banks has eased to 864.2 billion yuan as of end November, down 14 per cent from its peak of 1 trillion yuan earlier last year, according Hong Kong Monetary Authority data.

A HKMA spokeswoman said Hong Kong remains competitive in its role as offshore yuan trading centre.

“There are many factors affecting the size of the yuan liquidity pool in Hong Kong,” she said. “Banks for instance can adjust their yuan interest rates to attract deposits according to their funding needs and market conditions. The size of the yuan liquidity pool in Hong Kong, which is the largest outside mainland China, has been able to support the various yuan business activities in Hong Kong.”

Meanwhile, other analysts believe the softening currency will have added benefits that will reshape currency trading dynamics in coming months.

Brett McGonegal, chief executive of Reorient Group, said a weaker yuan will help stabilise the economy in China.

He added on the downside, issuance of yuan-denominated dim sum bonds will likely come to abrupt end, as investors shy away from the fixed-income investments that stand lose out on the forex front.

“Hong Kong’s inability to develop any real yuan products other than dim sum bonds, which are massively hurt by this, will negatively effect Hong Kong’s role in capturing yuan business,” McGonegal said.

Hong Kong financial institutions helped to shepherd 338 dim sum bonds to market last year totalling 160.37 billion yuan, down 53 per cent from 2014.

Bob Partridge, managing partner of EY transaction advisory services & private equity of Greater China and Asia Pacific, said the weaker yuan would affect bond issuance but would not mergers and acquisitions activity in China.

“The market and the foreign buyers have expected the yuan will devaluate although they do not expect it would devaluate so quickly in the first week of 2016,” Partridge said.

He said the cheaper yuan would make assets in China more attractive to foreign buyers. For the Chinese companies which plan to buy overseas companies, however, outbound investment becomes more expensive.

“Although the deals may become more expensive due to the currency issue, it would not stop Chinese companies to go out to do mergers and acquisitions as many of them are cash rich,” Partridge said.