HK banks will have to raise interest rates to attract offshore RMB deposits

The expected depreciation of the renminbi (RMB) against the Hong Kong dollar, which is pegged to the US currency, could diminish the appeal of renminbi-denominated products that have proliferated in past months to meet demand, bankers said.

Mild depreciation pressure will be expected for the currency in the coming months of 2015 following the central bank's move to cut its daily reference rate by a record of 1.9 percent, the most in two decades, triggering the renminbi's biggest one-day loss on Tuesday. The People's Bank of China (PBOC) set renminbi's midpoint at 6.2298 per US dollar on Tuesday, down from 6.1162 on Monday.

The PBOC move came after the country's export growth in July tumbled 8.3 percent year-on-year, the weakest reading since February 2014, because of waning overseas demand.

The PBOC on Tuesday announced that the rate cut was a one-time adjustment, noting that it planned to keep the renminbi stable at a reasonable level and would strengthen the market's role in determining the exchange rate fixing.

"We expect mild depreciation pressure (on renminbi) will be evident in coming months," DBS Bank (Hong Kong) Economist Nathan Chow Hung-lai said. "As the PBOC reiterates that this was a one-time change, we believe the renminbi exchange rate will be stable in the medium- to long-term period."

However, demand for renminbi-denominated investment products is widely expected to decline in Hong Kong because of market perception that the renminbi will further weaken.

"It is almost certain that the attractiveness of renminbi-denominated investment products will diminish given the depreciation expectations," Chow noted. "Banks would need to raise renminbi deposit interest rates, especially for renminbi-denominated time deposits, to attract capital."

"Hong Kong offshore renminbi deposits had been on a long-term uptrend based on the view that the renminbi would continue its appreciation or at least will not depreciate against the Hong Kong dollar. We think offshore renminbi deposits in Hong Kong will begin to decline from now," J.P. Morgan said in its currency research report.

The depreciation so far was too small to make much of a difference to Hong Kong owners of businesses on the mainland. "Hong Kong factories on the mainland are still troubled by rising labor cost, material cost and other operating costs," Federation of Hong Kong Industries Honorary President Stanley Lau Chin-ho said.

"The renminbi has to depreciate further, at least over 5 percent, in order to stimulate overseas exports and regain competitiveness," Lau noted.

oswald@chinadailyhk.com

(HK Edition 08/12/2015 page11)