Hong Kong set to reach offshore yuan milestone

Hong Kong will reach the 1 trillion yuan ($165 billion) milestone of renminbi deposits in 2014, Standard Chartered Bank predicted on Tuesday.

The bank's Renminbi Globalization Index was up 78.9 percent year-on year as of Nov 30, standing at 1,301.

"Thanks to strong growth in deposit and cross-border payments across major offshore renminbi markets including Hong Kong, Taiwan and Singapore, the yuan now ranks as the 10th most-used global payment currency.

"We expect it to replace the Japanese yen as the fourth-largest payment currency by 2020," said Kelvin Lau, senior economist of Standard Chartered Bank (Hong Kong) Ltd.

"Hong Kong is highly likely to see its renminbi deposits exceed 1 trillion yuan in 2014, given the ... steady appreciation of the yuan and further expansion of cross-border usage of the currency," Lau said.

Yuan deposits in Singapore rose to 172 billion yuan in October from 160 billion yuan in September. As of Nov 30, the yuan pool in Hong Kong was 827 billion. Taiwan's yuan deposits rose to 155 billion yuan in November from 123 billion yuan in October.

More than one-fifth of cross-border trades will be settled in the yuan within two years, the bank found in a survey of domestic companies and cross-border traders. Respondents said that on average, 14 percent of their trades were settled in renminbi in 2013. They expect that figure to increase to 21 percent over two years.

"The People's Bank of China has done what it can to relax regulations on the front of trade settlement in yuan," said Carmen Ling, global head of renminbi solutions at the bank.

"To further increase the share of the yuan in cross-border trading depends on the willingness of importers and exporters. They need to be more proactive in switching to the currency and find a way to split the benefits of the change."

Meanwhile, more fundraising activities are expected. "As growth of deposits is adding offshore liquidity this year, we will see more attempts to tap cheap funding outside the Chinese mainland," said Ling, adding that additional repatriation channels for offshore renminbi will lead to the rise of yuan-denominated loans outside China.

In February 2013, the State Council set up an experimental zone in Kunshan, Zhejiang province, to boost economic cooperation with Taiwan. The zone allows cross-border loans. In August, a note for 5 million yuan, the first cross-border renminbi loan from Taiwan to the Chinese mainland, was recorded.

On Dec 12, the PBOC issued a document allowing companies in the China (Shanghai) Pilot Free Trade Zone to borrow yuan from the offshore markets.

At the same time, according to Ling, more than 250 billion yuan worth of dim sum bonds (yuan-denominated bonds issued outside of the mainland) are due to mature in 2014.

"We expect issues of dim sum bonds to raise more than 500 billion yuan in offshore markets in 2014, compared with more than 300 billion yuan last year," said Nathan Chow, vice-president and economist of DBS Bank Hong Kong.

"Market sentiment is good this year. Companies with maturing dim sum bonds will issue new ones. Besides, the cost of capital on the mainland is rising as finance will continue to be tight at least in the first half.

"Rates in the offshore markets are more attractive. We expect more mainland companies seeking funds outside."

Chow and Ling agree that the next big move involving offshore yuan will involve investment rather than trade.

He added: "Apart from trade settlement, the yuan has to become an investment currency; otherwise, the offshore renminbi market will not see a breakthrough."

The latest question is whether the authorities will waive the daily conversion cap of 20,000 yuan for bank accounts in Hong Kong, said Chow. "The development depends on how fast and to what extent China opens its capital account."

Chow said that overseas institutions such as banks are looking forward to participating in the interbank market on the mainland and are interested in issue bonds and certificates of deposit in China.

He said that to keep the financial markets stable, the authorities can set quotas initially and relax the regulations gradually.