Hong Kong banks offer structured deposits to yuan bearish investors

HONG KONG (Reuters) - Banks in Hong Kong have started to provide yuan structured deposit products to investors who are betting the Chinese currency will depreciate in coming months, amid weak sentiment over the outlook for China's economy and currency.

The products come at a time when the yuan experienced its most sustained depreciation ever at the beginning of this year, after China's central bank engineered a sharp fall to shake out hot money speculating on non-stop yuan appreciation.

Bank of China Hong Kong, the yuan clearing bank in the former British colony, launched a yuan structured product last week that will give investors an annual return of 5 per cent if the yuan falls about 1.7 per cent in nine months.

The target level to obtain the maximum potential interest rate is for the yuan to reach the USD/CNH spot rate on May 30 plus 0.1080, a spokesperson at the bank told Reuters late on Tuesday.

Hang Seng Bank has also offered a product called"currency-linked capital protected investment deposit", which shows that if investors deposited yuan on May 27, they will enjoy an annual return of 5 per cent if the yuan falls to 6.4180 by Feb. 12, 2015.

However, if the yuan does not reach the trigger level, investors will only obtain an annual return of 0.1 per cent, much lower than those of vanilla yuan deposits which carry interest rates of more than 3 per cent in the market.

"There were structured deposits to short currencies before, but not for the yuan, as it had shown one-way appreciation until the end of last year," said Daniel Chan, wealth management director at Brilliant & Bright Investment Consultancy Limited. "For these yuan bearish products, we saw some interest among our clients who want to diversify their investment portfolios and manage currency risks," Chan said.

The yuan has fallen 3.2 per cent so far this year, wiping out all its gains in 2013 and becoming one of the worst performers among its emerging market peers.

Bearish sentiment on the yuan has risen slightly on concerns that economic growth may be cooling more rapidly than expected. Investors have been taking bearish bets against the currency since mid-March, according to a Reuters bi-weekly survey.

In the offshore non-deliverable yuan market where global investors bet on future yuan direction, nine-month contracts traded at 6.2430, implying the currency may depreciate 1.2 percent in nine months' time.

China's annual economic growth slowed to an 18-month low of 7.4 per cent in the first quarter, raising the risk that the world's second-largest economy could miss its growth target of 7.5 per cent this year, for the first time in 15 years.

Market participants say that in addition to the products offered by Bank of China Hong Kong and Hang Seng Bank to retail investors, some other banks are also providing similar products to their private bank clients.

Competition for yuan deposits in Hong Kong has intensified in the past few months as banks increased interest rates to attract new yuan funds that can be used for investments in broader channels and markets.

Yuan deposits in the world's largest offshore yuan centre amounted to 945 billion yuan at the end of March, accounting for more than 10 percent of Hong Kong's total deposits. The Hong Kong Monetary Authority will release the April data on Friday.