Outlook for Hong Kong banks’ yuan business still robust despite recent volatility

Yuan deposits in city fell 14 per cent last year

PUBLISHED : Thursday, 14 January, 2016, 12:58pm
UPDATED : Thursday, 14 January, 2016, 12:58pm

Hong Kong’s banking industry is unshaken in its outlook for yuan business despite recent volatility observed in the offshore currency.

Demand is strong and rising for loan and risk management services they provide, with loan bankers at some banks saying strong demand for merger and acquisition financing has already filled out their pipelines well into the third quarter of the year.

Commenting on market concerns over a dip in yuan deposit funding, Helen Wong, greater China chief executive at HSBC, said: “The RMB business is more than just deposits – it is also about lending and risk management. Hong Kong still has a lot of mainland corporates coming here to raise debt financing. As the yuan becomes the top three or top five currency, Hong Kong will see more RMB business volumes. Our regulations and risk management capability are our advantages.”

The depreciation of offshore yuan led to yuan deposits in Hong Kong decreasing by 14 per cent last year. The offshore yuan has risen 1.7 per cent against the US dollar this week after People’s Bank of China’s intervention, wiping out all the depreciation seen last week.

E Zhihuan, deputy general manager at Bank of China (Hong Kong), said: “Hong Kong banks have plenty of opportunities under China’s continued interest rate reform and capital account opening.

Hong Kong has a key role in China’s ongoing economic development
Adrian Li, Bank of East Asia

The Belt and Road initiatives and the implementation of the 13th five-year plan will translate to concrete businesses for the year. With the yuan now a de facto SDR currency, there is also effective support for Hong Kong’s offshore yuan hub development in 2016.”

Adrian Li, deputy chief executive at Bank of East Asia, said: “Hong Kong has a key role in China’s ongoing economic development, both in the nation’s latest five-year plan and in the Silk Road initiative.”

BOCHK dominated the Hong Kong loan market underpinned by Chinese corporate demand in 2015, taking up 17 per cent of the overall market share in Hong Kong, ahead of Standard Chartered, HSBC, Mizuho and ANZ.

Sophie Jiang, head of Hong Kong and China banks equity research at Nomura, said net interest margins for yuan loans would do well in 2016, with BOCHK being a leading candidate to benefit as it moves more of its assets into the business. The bank has the largest available quota of 9 billion yuan to tap cheap onshore funding via panda bond issuance on the mainland.

“We expect the profitability of offshore RMB operations to grow rather than shrink; banks have been allocating more assets into yuan loans from interbank placements,” Jiang said.

Other than loan and deal advisory works, banks are keen to help service the anticipated annual US$100 billion flows which global central banks will begin allocating into yuan-denominated assets underpinned by Chinese government and policy bonds, ahead of the yuan formally joining the International Monetary Fund’s Special Drawing Rights basket on October 1.

Hong Kong Exchanges and Clearing is understood to be close to announcing its bond connect programme which will open international access to mainland fixed-income instruments.

Bank traders in the market say they are keen to participate in the trades. HKEx is recruiting partners to perform market maker roles for the hedging instruments in the works that will be released at a later date to support the new investment access.

Ahead of the anticpated announcement, Deutsche Bank has this week released buy calls to international clients for Chinese government bonds, along with a new proprietary effective exchange rate index to guide client trading.

Deutsche Bank strategist Linan Liu said: “We believe financial deepening in the RMB bond market will accelerate in 2016 and with China gradually liberalising bond market access by foreign investors and borrowers, the RMB bond market is an emerging global asset class to facilitate investment diversification and financing demands on a global scale.”

According to figures from the Hong Kong Monetary Authority and Nomura, yuan loan volumes made through Hong Kong banks reached a record 294 billion yuan in the fourth quarter of last year, chalking up a near 85 per cent year-on-year increase from the 160 billion yuan level in 2014.

Average daily trading volume for the the HKEx’s yuan futures, offered through 90 local players, skyrocketed by 317 per cent to HK$443 billion, up from the HK$106 billion level seen for the whole of last year.

The outstanding value of HKEx’s yuan futures business is now touching US$2.7 billion, more than double the US$1.1 billion at the start of last year.