Hong Kong banks are nudging up the interest rates they pay on yuan deposits to fill the loss of yuan being sent back to the mainland.
In order to compensate for a cash crunch across the border last month, many Chinese firms moved their offshore yuan deposits back to the mainland, suggesting a decline in such deposits in Hong Kong.
Interest rates for yuan deposits climbed as high as 3.5 per cent in the city, but they might fall to a normalised level of about 2 to 2.5 per cent by the end of this month after the supply of onshore yuan liquidity stabilised, a senior executive at a leading bank said.
Kelvin Lau, a senior economist at Standard Chartered Bank, said he did not expect a continuous outflow of yuan back to the onshore market as market mechanisms such as raising interest rates would adjust the equilibrium.
Three banks launched new promotions for yuan deposits yesterday. Citibank offered an interest rate of 3.5 per cent on one- and three-month yuan deposits, and the minimum amount required is 20,000 yuan (HK$25,045).
DBS Bank offered 3.28 per cent for three-month yuan deposits through online applications, applicable to new funds of a minimum amount of 300,000 yuan.
China Citic Bank International also relaunched its time deposits on yuan yesterday with an interest rate of 3 per cent, applicable to monthly instalments of a minimum amount of HK$3,000 or equivalent for 12 months.
Teddy Wong, the head of deposits and secured lending at Standard Chartered, said the shortage of yuan on the mainland had pushed up interbank rates both on the mainland and in Hong Kong.
"We are offering higher rates on yuan deposits because of the increase in the interbank rates," Wong said.
The shortage of yuan liquidity on the mainland eased from last month. One-week onshore yuan interbank rates declined to 3.65 per cent yesterday from between 6 and 7 per cent at the end of June, while the one-month interbank rates dropped to 4.3 per cent from between 7 and 8 per cent.
Yuan interbank rates in the offshore market also went in the same direction.
In May, yuan deposits in Hong Kong rose for a eighth month to almost 700 billion yuan, the highest since local banks started their retail yuan business.
Yuan deposits grew 3.1 per cent to 698.5 billion yuan in May, the Hong Kong Monetary Authority said. Total remittances of yuan for cross-border trade settlement were 318.1 billion yuan, rebounding 15.5 per cent from April, when they fell 19.1 per cent from the previous month.
But such deposits in Hong Kong were likely to slow in the second half of the year before accelerating again next year, Standard Chartered said. The firm lowered its estimate on yuan deposits in the city to 700 billion to 750 billion yuan at the end of the year from the previous projection of 800 billion yuan. It also estimated yuan deposits in Taiwan would rise to 100 billion to 150 billion yuan by the end of this year from 66 billion yuan now.