Across The Border

Hong Kong’s yuan deposits fall 46 per cent from their 2014 peak

Analysts believe the RMB pool will continue to drain as a result of the devaluation of the yuan, and US interest rate rises

PUBLISHED : Tuesday, 07 February, 2017, 11:57am
UPDATED : Tuesday, 07 February, 2017, 9:43pm

Yuan deposits in Hong Kong have dropped 46 per cent from their peak of December 2014, and analysts see no end in sight for the exodus, as the currency continues to devalue.

However, they also believe any damage to the city’s reputation as a leading offshore yuan trading centre will be largely undamaged, as long as the city can provide more new yuan products that help with the currency’s internationalisation process.

Yuan deposits in Hong Kong dropped to 546.7 billion yuan by the end of December, a sharp 35 per cent fall from 851.11 billion yuan in 2015 and down 46 per cent from the peak of 1.004 trillion yuan in December 2014, according to Hong Kong Monetary Authority. Those deposits at the end of last year were at their lowest level since 2012.

Let’s remember the yuan, also called the renminbi (RMB), is not yet fully freely traded on the international markets, but since 2009 Beijing has gradually allowed the world to use the currency to settle trade and in 2010 allowed the issuance of yuan-demoninated investment products.

Subsequently Hong Kong, quite naturally, positioned itself as a leading offshore yuan trading centre, and deposits held in the city of the Chinese currency just kept rising, from 2010 until the peak at the end of 2014, at just over 1 trillion yuan.

That bulging deposit pool started to drain, however, from August 2015 when China completely surprised the world with a 2 per cent devaluation of the yuan against the greenback, in an effort to boost the weak economy.

The yuan fell 7 per cent against the greenback last year, the largest annual fall since records started from 1994.

Hang Seng Bank executive director Andrew Fung said that dramatic devaluation has led depositors to favour Hong Kong dollars and other currencies to escape the exchange losses.

“Factual depreciation of the yuan and continuous negative outlook of the currency has led to the shrinking pool of RMB deposit in Hong Kong. This is not just happening in Hong Kong but also in the aggregate offshore market,” Fung said.

Fung expects to see further falls in yuan deposits as market uncertainty remains – but he’s hopeful this is still unlikely to affect the ongoing development of yuan products in Hong Kong.

“The yuan deposit pool is not a major development benchmark. It is only a transitional reference, if there is no active circulation, a dead pool means nothing to development,” Fung said.

“Hong Kong remains the largest offshore yuan clearing centre. Demand for yuan investment products including bonds and insurance policies rise and fall with the bull and bear cycle of the yuan. This is natural for all currencies. The size of the yuan deposit pool will also rise and fall with the exchange rate cycle of the currency,” Fung said.

Keith Pogson, a senior parter at accounting firm EY, however, said rising US interest rates, and hence those in Hong Kong, would add further pressure to the volume of yuan deposits held here.

“Many depositors have looked at the interest rates on offer and also the potential decline in RMB exchange rates versus the US dollar and have decided to act with their feet,” Pogson said.

Capital Link International chief executive Brett McGonegal also expects deposits to continue falling.

“Fixed deposits globally offer little or no return for most and until we really see proof of a rising rate environment they will stay at these levels for the near future,” McGonegal said.

“With the continued decreasing value of the yuan, it makes perfect sense that depositors are seeking different paths and forms, until things change significantly.”

McGonegal said the lowering in yuan deposits wasn’t only related to the devaluation, but also because the Hong Kong government and financial sector in general are yet to develop sufficiently interesting yuan products to attract investors other than simple yuan deposits.

“Yuan products will be created and will thrive in the coming years on the international markets. It is unfortunate, though, that Hong Kong institutions have not only squandered this play but that the government has also shown limited interest in changing its course of action,” he said.

McGonegal added the new US political regime has led to currency market volatility with only the US dollar and euro considered stable, while the pound and Japanese yen remain fragile.

“This will inevitably lead to the next wave of internationalisation of the yuan and will prove to be a key inflection point in the global acceptance of the currency,” McGonegal said.

“And this is precisely why Hong Kong should be more focused than ever before on cementing itself as the capital for renminbi-based investment products, not just savings accounts.”