HONG KONG, Feb 12 (Reuters) - Regulators and banks in Hong Kong are acting to meet increasing demand for the yuan currency and to deal with elevated interbank lending rates ahead of China’s Lunar New Year holiday starting next week.
Seasonal demand for the Chinese currency has compounded already tight liquidity in the offshore yuan market. This tightness is mainly caused by the repatriation of yuan back to China under schemes such as Shanghai-Hong Kong stock connect.
Fears of a potential credit crunch have forced Hong Kong banks to offer attractive deposit rates to retain existing clients and attract new funds.
China Citic Bank International started to offer its existing depositors a return of 4.1 percent for three-month yuan deposits on Wednesday, after it provided preferential rates for new clients last week.
India’s ICICI bank also hiked its one-year yuan deposit rate to 4.25 percent last week, according to local media.
By comparison, the benchmark interest rate for one-year yuan deposits in mainland China is now 2.75 percent after the central bank cut it in November, the first cut in more than two years.
“After we offered preferential rates to our private bank and new clients last week, inquires have increased a lot and there are more new accounts being opened,” said Rebecca Chan, head of assets & liabilities at China Citic Bank International.
Overnight lending rates for offshore yuan surged to a record high of 8.6 percent last Friday as banks readied yuan funds for the new year holiday in China from Feb. 19 to 25.
A Hong Kong Monetary Authority (HKMA) spokesperson told Reuters by email that the HKMA had noticed recent tightness in the offshore yuan market and would adjust liquidity facilities if needed.
The city’s de-facto central bank launched a 10 billion yuan ($1.60 billion) intra-day repurchase facility and assigned seven banks as primary liquidity providers (PLP) for offshore yuan market in November.
“Many banks have tapped this intra-day facility since it was launched,” the HKMA said.
The offshore market needs more convenient intra-day liquidity support with larger scale to avoid volatility caused by short-term factors because yuan trading volumes have increased rapidly, said Ba Qing, an analyst at Bank of China Hong Kong.
In the onshore market, the People’s Bank of China said on Wednesday that all of its province-level branches will be allowed to extend credit to financial institutions. Previously, only 10 major provincial-level PBOC branches were able to do so.
Sufficient onshore liquidity helps relieve cash shortages in the offshore market as many financial institutions which operate both on the mainland and in Hong Kong can transfer funds across borders.
“Liquidity in the offshore market is still tight. As to how long it will last depends on trading activities such as squaring FX positions as well as the inflow and outflow of yuan funds,” said China Citic Bank International’s Rebecca Chan.
* Yuan deposits in South Korea fell in January, the country’s central bank data showed. The decline in yuan holdings was due to accounts not being rolled over on maturity as depositors decided against re-investing in the yuan.
* The quota for Shanghai-Hong Kong stock connect scheme was not a problem and would be very easy to adjust, Charles Li, Chief Executive of Hong Kong Exchanges and Clearing said on Tuesday, responding to market concerns that the quota will soon be exhausted.
* Export-Import Bank of Korea (Kexim) has raised 1 billion yuan ($160 million) through a 2018 Formosa bond priced to yield 4.4 percent, IFR, a Thomson Reuters publication, reported on Wednesday.
* The Standard Chartered Renminbi Globalisation Index rose to 2,089 in December, up 2 percent from the previous month, the bank said on Wednesday. The December increase was led by cross-border Renminbi payments and CNH FX.
Volatile interbank lending rate in offshore yuan market: link.reuters.com/fev93w
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$1 = 6.2422 Chinese yuan renminbi Editing by Eric Meijer