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 deposits see wide range in rates
Banks split on currency's prospects amid cash squeeze and slowing economy on mainland
Banks in Hong Kong are divided on the prospect of the yuan appreciating and are offering wildly different interest rates, with the outlook for the currency clouded by the liquidity crunch on the mainland and a slowing economy.
While HSBC and Citibank are willing to pay an annual interest rate of just 0.6 per cent to attract six-month yuan deposits, China Construction Bank (Asia) on Monday offered up to 5.2 per cent to new customers for fresh deposits.
China Citic Bank International, which has been active in attracting yuan deposits, also on Monday announced it would pay new customers 3 per cent interest for three-month deposits. The same day, HSBC cut the rate for three-month yuan deposits to 2.2 per cent.
The yuan has been the only Asian currency to have appreciated against the US dollar so far this year, growing at an unexpectedly fast pace of 1.7 per cent. Yet the deposit rates that many banks are offering are still far higher than that figure.
"Lots of Chinese banks, such as China Construction Bank, may have been affected by the credit crunch on the mainland and are keen to replenish their capital base," said Liu Ligang, an economist at Australia and New Zealand Banking Group.
"Some Chinese lenders are willing to pay high deposit rates here also because they can lend the capital at even higher rates on the mainland. But foreign banks are being more conservative."
Hong Kong banks also possibly saw a different valuation path for the currency in the second half, said market watchers.
China Citic Bank economist Liao Qun said he expected the yuan to appreciate up to 2.5 per cent against the greenback this year, banking on Beijing's efforts to boost cross-border loans that he believes would support the demand for the currency even as exports slump.
But HSBC economist Qu Hongbin expects the yuan to gain by less than 2 per cent for the whole of this year.
"The slow appreciation of the yuan we have seen in the first half is hard to continue for the rest of the year as the capital inflow to the region has been reversed recently in response to a strengthening dollar," Qu said.
CICC, a mainland investment bank, said the appreciation trend of the yuan was poised to reverse in the second half, after exports and imports both dropped last month as the country's growth momentum appeared to slow.
The economy grew 7.5 per cent in the second quarter from the same period last year, compared with 7.7 per cent growth in the January-March period, new data showed on Monday.
The yuan's value against the US dollar might drop 1 per cent, after exports in June fell to the worst level since October 2009, said CICC chief economist Peng Wensheng.
Additional reporting by Ray Chan