Stronger yuan a boost for Hong Kong banks
The recent strengthening of the yuan against the US dollar might mean we have to shell out more for "Made in China" labels, but it is good news for local banks and depositors with yuan on hand.
The currency reached its highest level against the US dollar in 19 years on Thursday, on the back of rising usage worldwide.
With countries such as Australia, Britain, France, Singapore and Japan all eyeing the growing yuan business, the Hong Kong Monetary Authority the same day decided to throw its weight behind the local banking industry.
HKMA chief Norman Chan Tak-lam announced a range of new measures to enhance the city's role as an international offshore yuan trading centre. From June, Hong Kong will introduce what Chan said would be the world's first offshore yuan interbank rate, with the city's banks setting the interest rate on interbank loans on a daily basis.
He also said the HKMA would relax two regulatory requirements to allow banks to use less capital for yuan business and encourage them to offer more yuan loans and other products.
Hang Seng Bank executive director Andrew Fung welcomed the HKMA's new proposals, saying they would allow more flexibility in yuan liquidity and level the playing field for Hong Kong vis-à-vis other centres.
"Hong Kong has the biggest [yuan] deposit base [outside the mainland] and hence the most active interbank lenders in the global market," Fung said. "Benchmark rates set by Hong Kong should be the most acceptable. It's confirmation we are the leading yuan offshore centre."
The HKMA said yuan deposits in the city stood at 810 billion yuan at the end of last month.
Fung said the recent strengthening of the yuan would bring more business for local lenders.
"A steady appreciation trend in this developing stage [of the currency] helps to convince foreign trading partners, central banks and investors to accept and hold yuan and is a positive for our business," he said.
Adrian Li, a deputy chief executive of Bank of East Asia, said yuan appreciation against the US dollar would make imported products cheaper for mainlanders, boosting consumption.
"This will lead to higher demand for import trade financing and benefit the foreign exchange business," Li said. "BEA will actively seize opportunities to expand its yuan project finance business, especially in granting cross-border yuan loans to companies incorporated in the Qianhai Development Zone."
The yuan is not fully convertible, but Beijing has relaxed rules since 2009 to encourage international businesses and investors to settle trade and investment deals in the currency. As a result, yuan is now the 13th most used currency for payment.
Some central banks are also looking to the yuan to diversify their portfolios. Australia's central bank said on Wednesday it would invest about 5 per cent of its foreign exchange reserves in yuan-denominated government bonds. The amount is estimated by bankers to be about A$2.4 billion (HK$19.2 billion).
Hang Seng Bank, its parent HSBC, Standard Chartered Bank, Bank of East Asia and Citibank were among the first lenders to offer yuan services when Beijing allowed the city's banks to conduct yuan business.
Historical data shows the currency's appreciation is a driving force for the yuan business. When banks first started offering yuan business in early 2004, they did not find many takers, as the foreign exchange rate remained tightly controlled, with little appreciation.
The yuan business took off only in May 2005, when Beijing carried out a foreign exchange reform that allowed the yuan to appreciate against the US dollar. This led depositors to swap their depreciating Hong Kong dollars for yuan.
The yuan has climbed to 6.18 to the US dollar, from 8.24 at the time of the reform - a 30 per cent gain for depositors who have held the currency since 2005.
Another breakthrough in the yuan business came in July 2010, when People's Bank of China deputy governor Hu Xiaolin came to Hong Kong to announce a further relaxation of the rules to allow international investors use yuan for investment and for a wider range of trade settlement.
Li said that as the yuan gradually internationalised, there would be greater opportunities for his bank amid further liberalisation of investment channels for offshore yuan to flow back to the mainland.
"There may be more opportunities for banks to participate in the domestic yuan bond markets. With the growth of yuan funds and more deployment channels, banks should be better placed to profit from this business," he said.
"Over the past few years, BEA's yuan loan business has maintained its growth momentum, especially after the introduction of cross-border yuan trade settlement. An increasing number of Chinese enterprises are setting up offshore offices in Hong Kong for their international trading business as well as for financing domestic activities."
John Tan Ming-kiu, the head of global markets at Standard Chartered Bank Hong Kong, said the recent rise of the yuan had given confidence to retail and corporate clients to buy and hold yuan assets and products.
"Further development of yuan trade settlement and rising interest in the currency will make the yuan business pie bigger and speed up the development of yuan-based financial products," Tan said, adding that the offshore yuan business was in its infancy.