HKMA: Move will reduce risk and boost deposit growth

Hong Kong-based lenders can keep as much funds as they want in special yuan-denominated deposit accounts that will be ultimately maintained with the People's Bank of China (PBoC), the city's monetary authority said on Thursday.

By allowing banks in Hong Kong last week to open a so-called yuan fiduciary account service with Bank of China Hong Kong Ltd (BOCHK), which has been the city's only yuan clearing bank since 2003, the regulators aim to reduce credit risk and boost yuan deposit growth in the SAR.

"According to the clearing bank, there is no upper limit for balances maintained in the fiduciary account," a Hong Kong Monetary Authority spokesperson said in an e-mailed response to questions.

Banks can now transfer yuan funds into an account maintained with the central bank and the proceeds of the account will no longer be included in the balance sheets of BOCHK, boosting the clearing bank's margins.

BOCHK said last month that the growing offshore yuan business had shaved its net interest margins by as much as 10 basis points last year.

As yuan deposit growth has mushroomed, banks have increasingly been exposed to counterparty credit exposure with BOCHK because they have had to keep their unutilized deposits with it to earn a few basis points as interest.

At the end of February, yuan deposits in Hong Kong totaled 407 billion yuan ($62 billion), a more than six-fold increase from a year earlier.

But while credit exposure concerns may have faded, banks in Hong Kong will have to contend with lower interest income on their yuan deposits.

The central bank lowered the yuan clearing interest rate in Hong Kong by 27 basis points to 0.72 percent, taking the rate to the same level as interest rates paid by the central bank on excess reserves of mainland financial institutions held by the PBoC.

Reuters

(HK Edition 04/08/2011 page3)