Bets on appreciation no longer the driver of yuan deposits in Hong Kong
Interest rate difference and the city's economic growth have become the driving forces behind the rise in yuan deposits in offshore markets
Bets on yuan appreciation have long been deemed the key reason for the accumulation of yuan deposits in offshore banking systems, but Hong Kong regulators say they have not been a decisive factor for a long time.
Hong Kong Monetary Authority executive director He Dong said yesterday that growth in yuan deposits in the city had instead mainly been driven by the interest rate difference between the yuan and the Hong Kong dollar, net yuan trade flow remittances and the city's gross domestic product growth.
"Back in 2010, appreciation expectation was an important factor in growing [yuan] deposits. But it has since become much less a factor. There have been other factors at play," He said in a public lecture.
"In the end, it is the continued growth of the economy and the weight of the mainland economy as both a trading nation and a provider of finance for the global financial system."
Yuan deposits and outstanding yuan certificates of deposit in the city totalled more than 1 trillion yuan (HK$1.25 trillion) at the end of last year, accounting for 70 per cent of the global offshore yuan liquidity pool.
Expectations of yuan appreciation have been weakening since 2012, according to HKMA research, acting as a drag on the growth of the city's yuan pool.
From the second quarter of 2012, the onshore yuan has been trading at a discount in the non-deliverable forward market against the spot market, suggesting market participants were expecting a cheaper yuan in the longer term, according to data from the authority.
He said weaker expectation of appreciation was not scary, but was a good opportunity for the yuan to grow as a funding currency and for the offshore yuan bond market - the so-called "dim sum market" - to expand.
"When you don't have such strong expectations for yuan appreciation, it would be more attractive to issue in yuan," he said, adding that the pickup in cross-currency swap rates as a result of lower expectations of yuan appreciation would encourage fundraisers to issue yuan bonds.
"In the press, the most-often-heard comments are that yuan internationalisation is driven by appreciation in the yuan," He said. "But the yuan should not just become an investment currency, but a funding currency. For the yuan to become the latter, it cannot have a consistently appreciating exchange rate.
"We need to have a longer benchmark in the dim sum bond market. If the authorities, in particular the Ministry of Finance, can issue in Hong Kong at a regular frequency and build the long end of the yield curve, that would be a major boost to the dim sum bond market."