Tight yuan liquidity may cap new loan biz

The long-awaited cross-border yuan loan scheme between Hong Kong and Qianhai in southern China, a $45 billion financial zone in the port city of Shenzhen, is drawing nearer with the first batch of banks involved to be announced next week.

The pilot program, which will help deepen Hong Kong's yuan business, is another step in China's ambitions to become a financial center and broaden international use of its currency.

But analysts said that tight offshore yuan liquidity in Hong Kong, which is likely to persist throughout the year, may limit profit margins, thus capping the benefits to be brought by the new loan business from the special economic zone.

"We expect demand for offshore renminbi borrowing to hold up in 2013, supported by continued low borrowing costs in Hong Kong and continued funding demand from Chinese corporations to fund their foreign trade-related activities," said Sonny Hsu, a senior analyst at Moody's in a report.

China set up the Qianhai business zone offering freer currency movements and Hong Kong professional standards last June. The government released rules in December for companies that incorporate in the area to borrow yuan loans from Hong Kong banks with interest rates and tenors to be fixed independently.

Bank of East Asia has lodged an application for extending a cross-border yuan loan to a customer incorporated in Qianhai and is waiting for approval, the bank's spokeswoman told Reuters on Thursday.

A senior banker at a Hong Kong lender participating in the new business said banks will sign an agreement next Monday in Shenzhen on the cross-border yuan loan programme, but the quota for each bank is not expected to be large initially.

The move will impel banks to migrate part of their yuan cash or deposits with China's central bank to the more lucrative loan business, which will widen their sources of income in addition to boosting interbank lending and yuan product investments.

However, the limited pool of offshore yuan funds available to banks may squeeze their returns due to the relatively high interest rates they have to pay to secure yuan deposits, analysts say.

"We expect the average deposit spread of the utilised offshore renminbi deposits will be reduced by 100 bps (basis points) in 2013 given the sharp rise in funding costs," said Steven Chan, an analyst at Citic Securities International.

Chan said the offshore yuan lending rate was about 5.5 percent in 2012, still 50 basis points below the 1-year benchmark lending rate in mainland China, and room for upside was quite limited this year.

Most analysts expect yuan deposits in Hong Kong to grow only mildly to reach 700 billion to 800 billion yuan ($113-$129 billion) by the end of this year, keeping yuan offshore liquidity at a relatively tight level.

Hong Kong's yuan deposits were flat last year, standing at 571 billion yuan by November, still 9 percent lower than the peak recorded in November 2011, due to more balanced trade flows, a main channel for offshore yuan accumulation.

Previous reports

HK will still be offshore yuan center: US offcial

Qianhai borrowers offered yuan loans from Hong Kong

Cross-border yuan trade pilot programs

Qianhai poised to be hub of cooperation

Banks see cross-border yuan business surge