The days of high interest rates on yuan deposits in Hong Kong may well be over as banks are no longer offering competitive rates, with the city's yuan liquidity pool bulging after the worst equity rout on the mainland in six years. Twelve-month yuan deposit rates reached 4 per cent in Hong Kong ahead of the stock connect scheme in November last year as almost all lenders in the city bid up the rates to attract more customers. Since early July, however, the dynamics in the city's offshore yuan market changed in the wake of the stock crash in mainland China. The increase in the yuan supply as a result has pushed key lenders in the city to start cutting deposit rates, with some bankers saying they expect rates to fall below 2 per cent in the second half. The yuan supply in the city is spiking as foreign investors move yuan out of mainland China and into Hong Kong through the stock connect scheme, amid worries over economic slowdown and an unfinished correction in the equity market that was stopped in its tracks by unprecedented government intervention. "The CNH deposit rate is trending down in Hong Kong," said Siu Kai-hung, a treasurer at Wing Lung Bank, which cut the one-year yuan time deposit rate from 3.5 per cent in April to 2.4 per cent on July 9. "It could fall below 2 per cent soon as Beijing steps up monetary easing and foreign investors park more renminbi in Hong Kong," Siu said. The direct trigger for the yuan deposit rate cut at Wing Lung, as at other banks, was a sudden increase in southbound yuan inflows to the city through the stock connect scheme as foreign investors rushed to cash out of mainland Chinese markets after a 30 per cent correction. Data from the Hong Kong stock exchange shows foreign investors have been net buyers of mainland Chinese stocks - except in April - through the stock connect scheme, with net investment in A shares amounting to about 122 billion yuan, since the scheme was launched in autumn last year. But investors had pulled out 42 billion yuan from the mainland Chinese equity market between July 6 and 20, following the market crash, the data showed. In addition, the monetary easing cycle guided by China's central bank is widely expected to accelerate and result in greater monetary supply, alleviating the pressure on local lenders to attract yuan deposits. The one-month CNH interbank offered rate, which reflects the short-term interbank financing cost of yuan, fell from a record high of 6.3452 per cent in February to 3 per cent on Tuesday. Yuan deposits in Hong Kong rose 1.8 per cent month on month in May to 972.4 billion yuan, the latest data from the Hong Kong Monetary Authority show. That was the biggest monthly increase this year, although it still fell short of the record one trillion yuan at the end of December.
