The People's Bank of China (PBoC) will cut the offshore yuan interest rate in Hong Kong, according to Bank of China Hong Kong (BOCHK), the only settlement bank for offshore yuan in the city.

The rate will be cut to 0.72 percent from 0.99 percent, effective today, BOCHK said on Thursday.

Based on the current arrangement for yuan settlement in the city, 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 the city's banks 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.

As a result of the rate cut, BOCHK will lower the deposit rate it offers to city lenders that deposit yuan with the clearing bank to 0.629 percent from 0.865 percent, the lender's spokeswoman Angel Yip said on Thursday.

The move is likely aimed at reducing pressure from yuan accumulation in the city, said Chong Wee-khoon, fixed income strategist at Societe Generale, commenting on the news.

Yuan deposits in Hong Kong, the major offshore market for the currency currently, jumped another 10 percent from January to 407.7 billion yuan in February, the Hong Kong Monetary Authority said on Thursday. That's a more than fivefold increase from a year earlier.

The increase in yuan volume came despite the fact that cross-border trade settled in yuan fell 19.1 percent in February on a month-on-month basis to 87.4 billion yuan.

The cut in the offshore yuan deposit rate will not change the trend of rising yuan deposit in Hong Kong, the Societe Generale strategist reckoned. Yuan liquidity in the city has been escalating in recent months amid rising expectations for yuan appreciation.

Premier Wen Jiabao is seeking to promote use of the yuan as an alternative to the US dollar in global trade and investment, without adding to pressure for the currency to appreciate. The yuan gained 4.2 percent in the past year and touched 6.5478 per US dollar Thursday, the strongest level since the country unified official and market exchange rates in 1993.

"Given the lower rate from the clearing bank, the participating banks are going to offer even lower returns on yuan deposits," said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong.

Separately, BOCHK said it will allow lenders involved in yuan settlement in Hong Kong to deposit the currency in a special account with the central bank.

The Hong Kong Monetary Authority said such fiduciary accounts for yuan settlement are designed to address the issue of credit limits on funds placed with the clearing bank, which had to account for them on its balance sheet.

"The custodian account is a big step forward as it eliminates the banks' difficulty on parking excessive yuan liquidity," said Becky Liu, a fixed-income strategist at HSBC Holdings Plc. Some banks have been investing such funds into the yuan bond market in Hong Kong.

China Daily - Bloomberg

(HK Edition 04/01/2011 page3)