Yuan deposits in Hong Kong climbed 15.6 per cent to 103.7 billion yuan (HK$119 billion) in the month of July alone. Cynics say this increase does not reflect Beijing's efforts to internationalise the currency but is simply the result of recent expectations that the yuan will appreciate in value.
So is the jump in yuan deposits a temporary boost or is it the beginning of a sea change?
Consider the dilemma of the financial controller of a listed manufacturer. Like most of his peers, he has two big problems. He has to get a decent return on the billions of Hong Kong dollars his business generates and its listing raised. His factories are based in southern China and export largely to the West, so the firm has revenues in US dollars and expenses in yuan. That's a pain as the yuan appreciates.
Ever since Beijing removed an unstated but effective ban on the use of yuan by companies in Hong Kong, he has met team after team of bankers claiming to have solutions to his problems.
With few exceptions, the offers are to convert his Hong Kong dollars into yuan. The pitch is that he would be earning interest that's more than 1.5 percentage points higher than the negligible 0.3 per cent return he's getting on his Hong Kong dollar deposits. The yuan deposits would also reduce the pain of his currency mismatch if the yuan appreciates.
Sounds interesting? Not really.
Since the conversion is not trade-related, under current restrictions it cannot be settled with the mainland's clearing bank at the official exchange rate. Instead, the yuan has to come from other sources, such as interbank transactions at 200 basis points above the official rate.
Besides, can the yuan funds be sent home to pay mainland bills and salaries? Can the yuan funds be converted back into Hong Kong dollars in the case of an emergency, and at what rate? The bankers are silent. To any prudent financial manager whose business is not to make a naked bet on yuan appreciation, these are valid questions.
So the financial controller was not excited about another meet-the-bankers session two weeks ago. This time he met the Hong Kong team of one of the mainland's four state-owned banks.
But during the first page of the presentation, his ears perked up. The offer included several key points.
One, the bank would convert his spare cash into yuan. He would have to come up with an 'estimation' of the firm's yuan 'trade-related' requirements in the coming 12 months. The size of the conversion would be matched against this estimate.
Rather than a market rate, he would be getting the official rate for his 'trade-related' conversion. The rules do not impose a restriction on the time lag between the conversion of the funds and their use. So it's all right to convert now and use later.
Two, the amount of trade-related yuan would cover not just trades between different firms but also those within the same firm.
As with most foreign manufacturers operating in China, a Hong Kong or foreign-based subsidiary sources raw material and services for the producing subsidiaries on the mainland. This trade used to be settled in US dollars. Now, it can be settled in yuan. Once again, this provides more yuan deposits in Hong Kong, a higher interest rate and better returns.
Three, the bank's Shenzhen subsidiary will pay any yuan bill or salary with the firm's yuan deposit in Hong Kong. No deal-by-deal government approval is required.
This is important because it's difficult to get yuan inside the country. Early last year, this financial controller spent a good deal of time trying to secure a yuan loan for his US$1 billion business. In the end, he got only three million yuan at a rate of 5 per cent. It's not hard to imagine how impressed he is with the latest offer.
Fourth, the bank will enter into a one-year contract with the client that locks in the exchange rate should the client decide to convert the yuan back into Hong Kong dollars in the future.
All these services would result in an annual net gain of 1.5 per cent above what he would have received on his billions in spare cash, the pitch book said. That does not take into account any appreciation in the yuan or any yuan bond or investment product that would provide higher returns than an ordinary bank deposit.
'It's a no-brainer,' said the financial controller.
You might imagine he has jumped for the deal. No. 'I am still hunting for the best price,' he said.
'Rather than the brains of one particular bank, this reflects Beijing's urge to increase [yuan] supply in Hong Kong. I am sure other competitive offers are in the pipeline.'
Exactly. Creativity is not permitted when it comes to the stability of the yuan. The lax interpretation of the rules and the rare regulatory accommodations would not have been possible without Beijing's blessing.
For a currency that is not freely convertible, the only way to increase its supply and its international usage is to increase the deposits overseas.
By the same token, the apparent advantage of the mainland banks should be seen more as a means of control rather than favouritism by Beijing.
That is illustrated in this particular listed company. As a manufacturer it has a genuine need for yuan; it has sizeable assets on the mainland and therefore a big stake in the country. And the company's yuan activities are all done via the tight monitoring of a trusted bank.
Matched with Beijing's controlled yet aggressive promotion of yuan conversion is a genuine demand for the yuan, the result not just of an expectation that it will appreciate but more important fundamental business considerations.
Among them are China's clout as both a factory and a market; the interest rate difference between the country and the rest of the world; as well as various regulatory hurdles conducive to holding yuan. These factors will not disappear soon.
The growth in yuan deposits is not a punting phenomenon. What we are witnessing is the beginning of a new chapter of world financial history. It may be happening in slow motion, but the page is being turned.