Hong Kong's yuan interest rates rise towards Shanghai levels

Move comes as depreciation hits international investors' appetite for the mainland currency

PUBLISHED : Saturday, 07 June, 2014, 1:13am
UPDATED : Saturday, 07 June, 2014, 1:13am

Yuan interest rates in Hong Kong are rising towards Shanghai levels at the fastest pace in a year as the currency's popularity wanes outside China.

The one-month interbank offered rate for yuan in Hong Kong jumped 50 basis points in May to 2.48 per cent, while Shanghai's fell 74 basis points to 3.86 per cent amid monetary easing by the central bank. Deposits in Hong Kong rose 15 billion yuan (HK$18.83 billion) in April, the smallest gain since August, as the yuan fell for a record fourth month versus the US dollar.

Depreciation is dampening appetite for yuan just as offshore investors are getting improved access to the higher yields of the domestic market. Premier Li Keqiang is expanding quotas for securities investments and setting up a free-trade zone in Shanghai, threatening Hong Kong's position as the global hub for yuan trading and investment.

"Capital-account opening will indeed lead to convergence of yields," said Tim Condon, head of Asian research at ING in Singapore. "The authorities want increased convertibility as part of their economic reforms. Ultimately it will mean the end of the CNH market," he said, referring to the trading code of the offshore yuan.

The People's Bank of China released detailed rules on May 22 for a free-trade account system in the Shanghai zone that would facilitate conversion of the currency and allow mainland companies to obtain financing from overseas. President Xi Jinping called the area an "important step" in China's reform process during his visit to the city last month.

The rules "suggest there will be more competition for offshore yuan liquidity from corporates and financial institutions to be directly used in the FTZ or channelled back onshore under capital-account regulations," Kewei Yang, a Hong Kong-based strategist at Morgan Stanley, wrote in a report. "There is a reasonable chance that fundamental change is happening."

China is pushing to reduce capital controls after policymakers last year pledged to carry out the biggest expansion of economic freedoms since the 1990s. The government usually implements policy changes through pilot projects that begin on a small scale and are rolled out incrementally once they have been tested.