Deposits of Chinese yuan in Hong Kong reached 1.06 trillion yuan (US$149.5 billion) in July, further cementing the city’s role as the largest offshore yuan hub as tailwinds gather for the currency’s internationalisation.
Yuan deposits in July exceeded 1 trillion yuan for the fourth month despite declining by 0.4 per cent, according to the Hong Kong Monetary Authority’s data published on Friday.
The total yuan remittance for cross-border trade settlement reached 1.28 trillion yuan, 1.6 per cent higher than in June.
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Improvement in equity-market sentiment and companies’ increasing need for yuan for trade settlement and working capital have contributed to the jump in yuan deposits in Hong Kong, according to analysts.
The Hang Seng Index rose 7 per cent in the second quarter, recovering from a 14-per cent slump in 2023 and a 3-per cent decline in the first three months of the year. Trade volume by mainland Chinese investors buying and selling shares in Hong Kong via the southbound channel of the Stock Connect mechanism also jumped in April and May, averaging 35 billion yuan and 52 billion yuan, respectively, compared with 28 billion yuan in the first quarter.
“All these are indications that investors, in particular mainland investors, who were previously sitting on the sidelines because of weak market sentiment at one stage, did return, and they were bringing their liquidity to Hong Kong,” said Kelvin Lau, Greater China senior economist at Standard Chartered Bank (HK).
Yuan deposits in the city have been steadily rising in recent years, driven by the “genuine business needs and investor needs for holding the currency”, he added.
“Hong Kong does not need to rely only on stock market-related activities to grow its renminbi deposits,” Lau said. “There are many other reasons we believe that international users are holding more and more renminbi deposits, structurally.”
Standard Chartered’s renminbi globalisation index, which tracks the yuan’s level of internationalisation, rose to record high of 5,324 in July, extending a gain of 17 per cent this year.
The bank’s report last week highlighted growing use of the yuan in global payments as a strong driver in the July uptick.
Yuan deposits in Hong Kong have been steadily rising in recent years, driven by the “genuine business needs and investor needs for holding the currency”, an analyst says. Photo: Edmond So alt=Yuan deposits in Hong Kong have been steadily rising in recent years, driven by the “genuine business needs and investor needs for holding the currency”, an analyst says. Photo: Edmond So>
The yuan’s share of global payments hit a record of 4.74 per cent last month, keeping its fourth-place spot in the ranking of payment currencies, according to data from interbank messaging service Swift. In addition, the currency ranked second with a share of 6 per cent in the global trade finance market.
“As long as companies continue to diversify their export reliance beyond traditional Western markets, especially the intra-Asia trades, there are more reasons to use the renminbi going forward,” said Lau.
Meanwhile, dim sum bonds, or offshore yuan-denominated bonds, recorded strong activity in recent months due to lower financing costs and buoyant mainland demand. The China finance ministry’s plan to offer 55 billion yuan in dim sum bonds this year in Hong Kong has boosted the tally, with the latest fourth offering of 9 billion yuan being completed earlier this month. That issuance was oversubscribed by 2.4 times.
“Hong Kong’s advantage as an offshore yuan hub is its cultural and geopolitical proximity to the people who actually use the currency and those who want to invest in that currency,” said Angela Chan, a partner at Clifford Chance.
The city’s significant population of investment banks, securities houses and family offices provides considerable investible capital for yuan products, said David Tsai, another partner at the law firm. “It could set the bar regarding regulation and product creation and continue to be the first mover,” he said.
Evolving foreign-exchange dynamics between the yuan and the US dollar are expected to become a new tailwind for the offshore yuan bond market, which in turn benefits the internationalisation of the yuan, according to Standard Chartered’s Lau.
“The fact that interest-rate cuts coming out from China will be much slower and shallower than the US means it’s usually positive for the renminbi,” he said.
International investors will be encouraged to move their money out of US dollar assets and into yuan assets as the yuan’s depreciation expectation has reduced, while mainland investors will continue to be interested in the higher offshore yields compared with the onshore, he added.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
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