In a growing sign of the Chinese currency's dominance, HSBC said the city's yuan deposits are likely to grow at a faster pace than Hong Kong dollar and other currency deposits, increasing to 30 per cent of all deposits by 2015 from about 10 per cent currently.
The rapid growth of the currency in the city has been triggered by the expanding use of yuan across the globe and the long-awaited removal of the 20,000 yuan daily conversion limit in the city.
HSBC expects the pool of yuan in Hong Kong, including customer deposits and certificates of deposit, to reach 2.6 trillion yuan (HK$3.3 trillion) by 2015 from 960 billion yuan at the end of October.
Yuan deposits in the city would likely experience double-digit growth each month, said the chief executive of HSBC's Hong Kong office Anita Fung Yuen-mei. It recorded a growth rate of 7 per cent - the highest since May 2011 - in October.
But yuan deposit growth would at the same time eat up part of Hong Kong dollar deposits and result in tightening liquidity as the yuan is still not a fully convertible currency, she said.
"More banks will have to strengthen their stable funding source to avoid losing market share," Fung said at a briefing yesterday. "The interest rates of both deposits and loans have no room to be reduced but only to climb up in the future."
In 2011, Hong Kong banks were less able to lend out money, usually in Hong Kong dollars and US dollars, because only yuan deposits were growing in the system. Banks had to pay higher interest rates to attract deposits in Hong Kong dollars and US dollars to support loan growth.
HSBC, one of the city's two leading banks with the largest yuan deposits, hoped to maintain its net interest margin - a measure of lending profitability - against competition from other banks in any potential liquidity tightening, Fung said.
Hong Kong, the first mover in offshore yuan business, is facing competition from London, Singapore and Taiwan. Asked if Hong Kong would lose out to other cities, Fung said the business was "far from a zero-sum game".
With the removal of the conversion limit by the People's Bank of China, Fung said Hong Kong should make the development of the offshore yuan centre its priority, rather than worrying about the competition.
Yuan-denominated wealth management products would receive more inflows when investors can convert the yuan easier.
"Such kind of wealth management products will grow two to three times in its size of asset under management in the next one to two years," she said, adding new issuance of dim sum bonds could reach 500 billion yuan next year from under 400 billion yuan this year.
There are growing concerns about the Hong Kong dollar being marginalised by the increasing use of yuan in investment and daily transactions.
Fung said she did not expect that to happen. "The Hong Kong dollar is the major currency of Hong Kong. People are still using it," she said, adding there is no grounds for the Hong Kong dollar to peg with the yuan, which is not fully convertible.