Hong Kong's yuan market has been a hot topic of conversation recently, but there are signs the market may be cooling down. The figures released by the Hong Kong Monetary Authority last week showed yuan trade settlements conducted in the city in July fell 27 per cent to 148.97 billion yuan (HK$181.7 billion) from 205.09 billion in June. It was the first monthly drop since the mainland relaxed rules last year. In July 2009, Beijing launched a pilot scheme to allow companies to use yuan instead of US dollars to settle cross-border trade, but such settlements only took off in February last year. Bankers said tightening trade financing policies and a slowdown in global trade were responsible for the decline. Anther indicator that the yuan market was cooling was a slower rise in deposits over the past two months. Deposits stood at 572.2 billion yuan at the end of July, showing an increase of 19 billion yuan during the month and only four billion yuan more than in June. By comparison, yuan deposits had their biggest gain - 68 billion yuan - in November last year. During the first half of this year, the average monthly growth of such deposits was 40 billion yuan. Yuan deposits are very much related to yuan trade settlement. A large part of the deposits in Hong Kong were from corporations. In fact, they represented 71 per cent of all yuan deposits in the first six months; most of them were from trade settlements. That means a drop in trade settlement will affect the growth in yuan deposits. The other major source of yuan deposits is linked to individuals who swap their Hong Kong dollars or other currencies for yuan. Normally, this is a way for retail investors to bet on the yuan, which has risen more than 20 per cent against the US dollar in the past six years and which many expect to climb further. Other than betting on an appreciating yuan, there is little reason for retail investors to exchange their Hong Kong dollars for the yuan. There are only a few yuan bond offerings, and they are mainly for institutional investors, such as mutual funds and insurance companies. While retail investors like to bet on stocks, no real yuan shares have been issued yet. Li Ka-shing's yuan real estate investment trust was launched in April, but its shares have not performed well. The yuan market here is reaching a plateau. For it to develop further, it needs more yuan shares and more yuan investment products offering good returns to investors. That way, yuan deposits could continue to rise, even if yuan trade settlement declined. Vice-Premier Li Keqiang last month announced measures to expand yuan business in the city, including allowing foreign firms to invest their yuan holdings directly in mainland projects instead of using US dollars. These measures are likely to encourage companies to issue yuan bonds or shares in Hong Kong to finance their mainland projects. Hong Kong Exchanges and Clearing next month will launch a system to make it easier for investors to get yuan to trade yuan shares. It also wants companies to use yuan in placements or rights issues. The question is, when will companies issue yuan initial public offerings or share placements? Since the stock market is in turmoil because of worries over the US economy and European sovereign debt crisis, this may not be the right moment to launch a fundraising. More time may be needed for the yuan share market to really take off.