Office workers walk past the Bank of China tower in Hong Kong. The bank is the sole yuan clearing bank in the city. Mike Clarke / AFP

The People's Bank of China (PBoC) plans to raise yuan clearing interest rates in Hong Kong to boost the development of the city's yuan offshore market, according to market sources.

The sources told Reuters on Tuesday that the central bank was discussing with banks the likelihood of revising deposit rates paid on offshore yuan deposits upwards, to align them closer with mainland deposit rates.

"The central bank is discussing details with banks and there will be an increase in interest rates, although it unlikely to lift rates to as high as levels on the mainland in one go," a source said.

The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, declined to comment on the tips.

"The interest rate payable on yuan funds deposited with the PBoC by the RMB clearing bank is determined by the PBoC," Anissa Wong, a spokeswoman at the HKMA, said in an e-mailed statement. "The HKMA does not comment on whether an increase of such interest rate is being considered by the PBoC."

Higher interest rates would theoretically boost the attractiveness of yuan-denominated deposits, encourage the introduction of more yuan products and increase usage of the yuan in the offshore market.

The PBoC's one-year deposit benchmark rate for the domestic market now stands at 3.0 percent.

The sole yuan clearing bank in Hong Kong - Bank of China Hong Kong (BOCHK) - is paid an annual interest rate of 0.99 percent by the PBoC for excess yuan it deposits with PBoC's Shenzhen branch after clearing. BOCHK then pays 0.865 percent to banks in Hong Kong for the yuan they deposit with it after charges and fees. These banks then offer yuan deposit rates of between 0.4 and 0.6 percent to customers, barely higher than Hong Kong dollar deposit rates, which are virtually zero.

An increase in the clearing interest rate would prompt BOCHK to raise the deposit rate it offers to other lenders and lead to higher returns on customers' holdings of the currency.

BOCHK said it was unaware of any planned increase in the rate. "We don't know the source of information regarding the Reuters report," spokeswoman Angel Yip said. "BOCHK hasn't received any information or instruction on the clearing interest rates."

The news sent yields on yuan bonds in Hong Kong - or the "dim sum" bonds as they are more colorfully known - briefly higher by 2-5 basis points on Tuesday, in a thin market as markets grappled with the prospect of higher interest rates in the near term.

Yuan circulation in Hong Kong has risen rapidly since the mainland lifted controls on the currency in the city last July. Yuan deposits quadrupled to 370.6 billion yuan in January from a year earlier.

But interest in using yuan assets in the offshore market have slowed somewhat after an initial surge, with investors complaining about the lack of investment products and relatively lower interest rates compared with the mainland.

Higher rates paid on yuan deposits would also encourage companies to leave their yuan in the offshore market rather than try to remit it to the mainland, a Hong Kong-based banker said.

The move would also boost the supply of bonds as investors hope for higher yields on forthcoming issues. Issuers have lined up to sell yuan bonds in the city, attracted by feverish demand for yuan assets and as the increase in deposits has outpaced asset growth by a big margin.

Total outstanding bonds within the SAR stands at about 80 billion yuan and the Royal Bank of Scotlad has forecast net new issuance of yuan bonds at 120 billion yuan in 2011 alone.

Reuters - Bloomberg

(HK Edition 03/23/2011 page2)