Yuan investments
The Chinese currency is back on an appreciation path and yields are up. So what's not to like about it, asks Jasper Moiseiwitsch
The yuan appreciation story is back on the boil. After a steady drop in the volume of yuan deposits held in Hong Kong over the past year and declines registered by the currency (against the US dollar in the middle of the year) on concerns about a decelerating mainland economy, last week the yuan somewhat surprisingly hit a 19-year high. Investors believe the economy is turning a corner, and are coming back into the yuan.
For those looking to hold yuan there's good news: interest rates on the currency are rising in Hong Kong. Tellingly, the most popular yuan investment product of the day is bank certificates of deposit (CDs), for which yuan rates beat Hong Kong dollar rates by a wide margin.
HSBC pays 3.05 per cent for a 12-month yuan CD, versus 1.4 per cent for equal CD in Hong Kong dollars.
The yuan is maturing. It's become like any other global currency. It fluctuates in value. Notwithstanding last week's gains, investing in yuan is no longer a straight bet on currency appreciation - it's become a more subtle choice about the instrument, issuer and returns.
Lawrence Mak, BNP Paribas' head of corporate banking, says Hong Kong banks saw a huge boom in yuan deposits following key liberalisations in 2010, but initially did not know what to do with the money. Companies did not want yuan loans, so banks could not lend to them in the currency, and offshore banks were blocked from investing in the mainland. So banks paid poor interest on yuan deposits.
Much has changed over the past two years. For example, Hong Kong banks can now invest in the mainland interbank market - they can lend money to mainland banks, which gives the foreign banks an income-generating use for the yuan.