Hong Kong's yuan deposits face heavy downward pressure this year as China allows the currency to weaken, even as banks raise yuan deposit rates to compete for business. Yuan accumulation in the offshore market lost momentum in 2015 after its largest yearly loss on record against the dollar, and fresh weakness early in 2016 is likely to reinforce investors' aversion to the currency.
The offshore yuan hit its weakest level on Wednesday since offshore trading began in 2010 as China's central bank continued to allow the currency to weaken. Yuan deposits in the world's biggest offshore hub for the currency stood at 864.2 billion yuan ($131.35 billion) in November, a bit higher than 854.3 billion yuan a month earlier but still hovering around two-year lows.
A shrinking pool and tight liquidity have pushed a slew of banks to increase yuan deposit rates to draw in new funds in the past few weeks, with some providing an annual return of over 4 percent for deposits of less than one year. By comparison, the one-year benchmark yuan deposit rate in the mainland has dropped to 1.5 percent after six interest rate cuts since November 2014. "The trend continues that investors switch yuan deposits to other currencies. Obviously, people lack confidence in the yuan at present and downward pressure on the yuan pool remains heavy," said Ngan Kim Man, deputy head of treasury at China Everbright Bank's Hong Kong branch.
The redback lost 4.7 percent last year and is expected to fall further this year as a result of China's weakening economic fundamentals and rising interest rates in the US Some analysts forecast it will hit 6.8 to the dollar by the end of the year. Pessimism on the yuan already reached the highest level in more than five years before the latest FX market turmoil, a Reuters poll done in early December among 18 fund managers, currency traders and analysts showed.
Analysts say about 70-80 percent of Hong Kong's yuan deposits belong to companies and the growth driver for this part used to be the big premiums the offshore yuan had over its onshore counterpart several years ago. "Now it has been totally reversed and the CNH is having deep discounts against the CNY. I think it is hard to find a new driver for yuan deposits in the short term," said Nathan Chow, an analyst at DBS Bank in Hong Kong.