Chinese banks from Hong Kong to London are selling a record amount of yuan-denominated certificates of deposit (CD) as China takes steps to curb outflows of the currency.
Sales jumped to an unprecedented 66.1 billion yuan (US$10.2 billion) this month, data compiled by Bloomberg show. That comes after Hong Kong’s pool of offshore yuan savings, the world’s largest, shrank to the smallest in two years, and Deutsche Bank AG said the currency’s depreciation pressures are weighing on deposits.
The Chinese government has in the past month imposed restrictions on yuan outflows, including ordering a halt to offshore banks borrowing from domestic markets through bond repurchases and suspending new applications in a program that allows domestic investors to buy overseas assets denominated in the currency.
The measures are aimed at making it harder for speculators to short the yuan in the offshore market, according to National Australia Bank Ltd.
“Given the attempts by Chinese authorities to keep offshore interest rates high to increase the cost of shorting the yuan, this trend will probably continue,” Standard Chartered Plc Hong Kong-based senior rates strategist Becky Liu (劉潔) said.
“The depreciation expectations have made it increasingly difficult for banks to get funds from the retail market. Coupled with higher interbank financing costs, commercial banks now have to turn to CDs to lock in stable and relatively long-term funding,” Liu added.
China has scaled back efforts to prop up the yuan after the IMF included the currency in its special drawing rights on Nov. 30. The yuan traded in Hong Kong has retreated 1.8 percent since then to 6.5517 per US dollar yesterday, and is set for the biggest monthly loss since August.
Savings in the Chinese currency in Hong Kong fell 15 percent this year to 854 billion yuan in October, according to the latest available data, prompting lenders including Bank of China (Hong Kong) Ltd (香港中國銀行) to offer higher interest rates to attract savers.
This month, an Agricultural Bank of China Ltd (中國農業銀行) unit sold 63 million yuan of six-month CDs in Hong Kong, while China Construction Bank Corp’s (中國建設銀行) London subsidiary issued 100 million yuan of three-month securities.
“CDs can help banks raise a lot of money in a relatively short period of time,” Bank of China (Hong Kong) yuan business division head Jack Yang said.
“Compared with selling yuan bonds offshore or attracting deposits from the retail market, it will continue to be the preferred way to raise funds for offshore Chinese lenders,” Yang said.
The yuan’s fading fortunes challenge Chinese President Xi Jinping’s (習近平) push to broaden global use of the currency. Foreign capital is also needed to offset ongoing domestic outflows, which are threatening to destabilize the exchange rate and push up borrowing costs amid the slowest economic growth in 25 years.
Financial institutions, including the People’s Bank of China, sold 221 billion yuan of foreign exchange last month, a sign of capital outflows, data showed this week.
The overnight Hong Kong interbank offered rate for borrowing yuan recorded its biggest-ever three-day increase last week, rising 458 basis points to 6.55 percent on Friday.
Its year-to-date average was 3.22 percent, an increase from 2.2 percent last year. The comparable rate in Shanghai was 1.82 percent last week.
“In the past, banks could attract deposits in the retail market, but the yuan depreciation expectations have made it very costly to do so, because fewer people want to hold the Chinese currency now,” Australia & New Zealand Banking Group Ltd Hong Kong-based senior economist Raymond Yeung (楊宇霆) said.
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