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Lack of investment options may stifle HK yuan push

By Liu Dongliang (Global Times)

10:15, August 25, 2012

Earlier this month, the Hong Kong Monetary Authority (HKMA) began allowing non-residents to open yuan accounts in the region, another example of the ongoing efforts of local authorities to build up Hong Kong as a major offshore yuan hub.

But, with few high-yield investment products denominated in the mainland currency offered in Hong Kong and access to the mainland's massive capital market still restricted for offshore investors, the HKMA still has its work cut out for it as it tries to attract yuan inflows from the mainland and other foreign markets.

Actually, these two problems have already pushed local yuan holders in Hong Kong, who were until a few weeks ago the only ones who could open yuan accounts with banks in the region, to pare down their deposits of the mainland currency. Yuan deposits in Hong Kong currently stand at roughly 550 billion yuan ($86.55 billion), down from 630 billion yuan at the end of 2011, according to official data.

Hong Kong's shrinking yuan pool has inevitably pushed up the yuan's financing costs in the city, which is counter to the local authorities' long-term goal of promoting the yuan's use in Hong Kong.

However, scrapping restrictions on offshore yuan holders doesn't necessarily mean that more yuan deposits will flow into the region, where their yuan deposits are still so poorly served.

As mentioned above, curbs on cross-border yuan flows between the mainland and Hong Kong are still tightly controlled by the government, which means that yuan deposits in Hong Kong from offshore have hardly any channels to enter the lucrative mainland market for investment and consumption. Also, as the yuan can only be placed in low-interest wealth management and fixed income products in Hong Kong, few would likely bother with the trouble of creating a yuan account in the area.

Unlike the mainland's government-intervened bank interest rates, Hong Kong banks are allowed to set their own interest rates based on market forces.

In a bid to lower costs on their depository businesses, the majority of Hong Kong banks offer one-year saving rates under 1 percent, much lower than the roughly 3 percent offered in the mainland. For some yuan depositors in Hong Kong, the interest rates they receive are not even enough to cover the service fees they pay for their accounts.

Accordingly, the annual yields of most of the yuan-denominated investment products available in the region, such as bonds and exchange traded funds, are less than 4 percent; well below the 5 percent to 10 percent one could expect to reap from similar products on the mainland.

Under these circumstances, Hong Kong still has a long way to go to attract the yuan from non-residents.

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