Hong Kong offshore yuan deposit pool to get boost from China’s reopening

HONG Kong’s offshore yuan deposit pool edged up 0.8 per cent in November to 892.3 billion yuan (S$172.4 billion) from a month earlier, rising for the fourth straight month as an increase in yuan trade settlement revived businesses’ interest in holding the currency.

As the first offshore market to launch yuan business in 2004, Hong Kong has served as a global springboard for the development of more yuan-related financial activities, helping to advance Beijing’s goal of the currency’s internationalization.

Yuan deposits rose 2.7 per cent last month from a year earlier, but were still down 18.6 per cent from its January historical peak of 1,096 billion yuan.

Offshore yuan (CNH) deposits stood at about 6 per cent of the city’s total banking deposits, according to data released by the Hong Kong Monetary Authority on Friday (Dec 30).

Analysts expect that the city’s CNH deposit pool will rise further as Chinese visitors return when borders reopen in January and seek offshore investments.

“The return of tourists could be a game changer for boosting the growth of CNH deposit pool next year,” said Chi Lo, Asia Pacific senior market strategist at BNP Paribas Asset Management.

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China’s strict quarantine measures, which it will drop for inbound travellers from Jan 8, had dried up tourist flows into Hong Kong.

This year’s overall decline in CNH deposits came as the yuan lost ground to a rising US dollar and China’s economy was hit hard by tough anti-virus measures, which the government began reversing in early December.

But the CNH pool has grown since August, mainly as more of China’s cross-border trades were settled in yuan, said Becky Liu, head of China macro strategy at Standard Chartered.

The increase in channels for mainland investors to tap offshore yuan products will also help the deposit pool grow, she said.

This includes the introduction of yuan-denominated stocks on the Hong Kong Exchanges & Clearing, slated for launch in 2023. This will give mainland investors the option to trade Hong Kong-listed stocks in their own currency.

Still, “we see Hong Kong’s CNH deposit pool to grow only slowly given the substantially widened interest rate gap between the US dollar and onshore yuan,” said Liu.