Bank of China Hong Kong and HSBC , two major banks in the offshore yuan market, have raised yuan deposit rates in Hong Kong, amid increasing competition to attract more yuan funds and maintain market share.

HSBC said its 6-month and 12-month interest rates for new yuan funds above 20,000 yuan ($3,182) will be up to 3.1 and 3.2 percent annually, while for existing funds the rate for 3-month and 6-month deposits could reach 2.0 and 2.2 percent, respectively.

For BoC HK, the annualized 3-month deposit rate will rise to as high as 3 percent for new funds or yuan converted from other currencies between Oct 4-31.

It had previously offered a one-year deposit rate of 2.7 percent for yuan funds above 50,000.

"It is quite common that banks fight for more deposits near the year-end, as they hope to maintain their market share and don't want to see a big deposit drop in their annual financial reports," said Ngan Kim Man, head of RMB business strategy and planning department at Hang Seng Bank.

China Construction Bank Asia last month lifted its one-year yuan deposit rate to 3.28 percent, surpassing the onshore benchmark deposit rate of 3 percent for the same tenor.

The offshore yuan deposit rate has been on the rise over the past few months due to a shrinking offshore yuan pool and more channels for yuan investment that offer better returns, especially in the vigirous bond and loan markets.

Ngan said annual returns on yuan loans could be around 4 percent in Hong Kong, while any further hikes in the deposit rate may be limited as the net interest margin was narrowing.

Some banks have raised their prime rates for yuan lending as a result of higher funding costs, with the prime rates offered by Hang Seng Bank and Bank of East Asia rising to 4 percent from 3 percent.

The offshore yuan pool has seen tight liquidity since the Chinese currency began to depreciate in the first half of the year and more yuan funds can now be repatriated to mainland.

The latest figure from the Hong Kong Monetary Authority showed yuan deposits in the former British colony declined 1.9 percent in August from the previous month to 552.3 billion yuan ($87.9 billion).

(HK Edition 10/05/2012 page2)