Hong Kong offshore yuan deposits seen extending October's rapid rise

HONG KONG Mon Dec 2, 2013 4:48am GMT

HONG KONG Dec 2 (Reuters) - A wide gap in the price of the Chinese currency in offshore and onshore foreign exchange markets suggests that a jump in offshore yuan deposits with Hong Kong banks in October may be repeated in November.

Yuan deposits with Hong Kong banks rose by their biggest margin in the month of October since April 2011, the latest data from the Hong Kong Monetary Authority, the city's de-facto central bank showed.

Deposits rose 52 billion yuan ($8.5 billion) to 781.6 billion yuan in October compared to a month earlier, the Hong Kong Monetary Authority said in a monthly report published on its website. Related chart: r.reuters.com/geh67t

"The widening price differential between the onshore and the offshore yuan attracted a lot of yuan buyers in the Hong Kong market, resulting in an increase in the deposit base," said the head of currency trading at a Chinese Bank in Hong Kong who declined to be identified.

While the Chinese currency in the Hong Kong market and on the mainland have traded virtually in lock-step with each other for most of this year, it started to diverge noticeably since September when the offshore yuan or CNH as it is popularly known started trading at a premium to the onshore rate.

That was driven by Beijing's resolve to keep a tight grip on the yuan's rise which has been easily the best performing currency in Asia this year with a gain of more than 2 percent against the U.S. dollar.

Onshore yuan rose 0.45 percent in October while the offshore yuan rose 0.6 percent in that period.

As state-run banks stepped up their currency market intervention to keep the onshore market in a tight range, likely on the behalf of the central bank, large companies betting on more yuan gains took to buying the Chinese currency in the Hong Kong market, opening up a gap for the first time since January.

"The October statistics could suggest that yuan flows between mainland China and Hong Kong have been skewed more towards flows into Hong Kong, likely on renewed expectations on yuan appreciation," said Frances Cheung, a strategist at Credit Agricole in Hong Kong.

The gap between the offshore and the onshore yuan hit a high of 149 pips on Oct. 4 and widened to more to 300 pips on Nov. 19 before pulling back somewhat, suggesting that CNH deposits in November may see yet another sharp jump.

Notwithstanding the currency market intervention, traders in Hong Kong said the heavy outright dollar selling in the mainland in October sparked the speculation of renewed yuan gains and triggered demand for yuan-denominated assets.

At a Nov. 21 auction for a Ministry of Finance yuan-denominated bond in Hong Kong, yields for the three-year tranche was priced at 2.6 percent, a new record low and far below 2.87 percent in June for a similar maturity.

Data released last month showed China's central bank and commercial banks purchased 441.6 billion yuan ($72.49 billion) worth of foreign exchange on a net basis in October, indicating China saw increased net capital inflows in October. Chart: r.reuters.com/pev95t

The Hong Kong Monetary Authority declined comment. (Editing by Kim Coghill)