Gone in 60 seconds: Chinese snap up dollar funds as yuan tanks

The latest wealth management products from China Merchants Bank Co in Shanghai last week, paying 2.37 per cent annual interest on US dollars, sold out in 60 seconds flat.
The latest wealth management products from China Merchants Bank Co in Shanghai last week, paying 2.37 per cent annual interest on US dollars, sold out in 60 seconds flat.PHOTO: BLOOMBERG

SHANGHAI/HONG KONG (BLOOMBERG) - Chinese savers, eager to convert their yuan before the currency keeps depreciating, are snapping up US dollar investment products that offer options for keeping money at home instead of sending it overseas.

The latest wealth management products from China Merchants Bank Co in Shanghai last week, paying 2.37 per cent annual interest on US dollars, sold out in 60 seconds flat. The product, available since 2014, only allows new investors to buy in when existing holders exit.

"You won't be able to get it online because it's gone in less than a minute," said a branch manager, who would only give the surname Xu, and encourages customers to book a day in advance next time.

A growing number of offerings of such US dollar funds and how quickly they're being purchased show the surging demand for foreign currency amid outflows that are estimated to have totaled more than US$1.5 trillion (S$2.17 trillion) since the beginning of 2015. By shifting into dollars - US, Australian and Hong Kong are among the favourites - deposit holders are shielded from the yuan's losses without having to take their money out of the country to seek returns.

"It seems an attractive choice to convert the yuan into the dollar sooner rather than later," Mr Harrison Hu, Singapore-based chief greater China economist at NatWest Markets, a unit of Royal Bank of Scotland Group, wrote in a note. He estimates that household purchases of foreign exchange could double to US$15 billion a month in the coming quarter, absent new controls.

A more hawkish than expected outlook from the US Federal Reserve after it lifted interest rates last week has helped accelerate a dollar rally, with analysts predicting further gains.

As the yuan has declined, China's authorities have tried to vigorously enforce strict rules on moving cash over the border, where it is often invested in purchases such as real estate. Chinese citizens are limited to exchanging the equivalent of US$50,000 a year into foreign currency.

 

Outflows may have edged up to US$80 billion in November from US$75 billion in October, according to Bloomberg Intelligence estimates. The State Administration of Foreign Exchange on Friday said that although November's outflows were bigger than the previous month, they remain in a stable range.

In recent weeks, policy makers in Beijing have put the brakes on everything from companies buying assets overseas to offshore purchases of life insurance to stem the tide of cash outflows. The fresh measures include checks by the currency regulator on any capital account transactions involving foreign exchange of US$5 million or more. That followed steps earlier this year to ban the sharing of foreign-exchange quotas.

In November, banks sold 49 per cent more foreign-currency denominated wealth management products, most of them in US dollars, than in October, according to PY Standard, a Chengdu-based wealth management research and ratings firm that tracks the data. November's foreign currency deposits increased 11.4 per cent from a year earlier, more than double the 4.8 per cent rise in October, according to the People's Bank of China.

Banks often use proceeds from WMPs to buy dollar-denominated bonds sold by Chinese companies offshore, according to Liu Dongliang, a senior fixed-income analyst at China Merchants Bank. It's easier for Chinese companies to get cheaper funding offshore, and they then can bring the money back onshore to be converted into yuan - an activity encouraged by the government, Liu added.

To avail of China Merchants Bank's dollar WMP, customers need to put in a minimum of US$18,000, and the amount can redeemed at any time. The annual return, which can float daily, hovered at more than 2.3 per cent last week. On Tuesday, the return was 1.97 per cent, according to bank's mobile phone application. 

Down the street, Ping An Bank offers a one-year US dollar WMP with an annualized return of 2 per cent. The latest issuance will have a quota of US$10 million, and each customer needs to buy a minimum of US$20,000. A bank executive said last month when a similar product was issued, it was gone in five minutes.

"Many customers converted yuan into dollars without any idea of where to invest the dollars," said a branch manager in Shanghai who gave the surname Pang. "They don't really care about the interest rate on the dollar, they just wanted to preempt further yuan depreciation."

The yuan has fallen 6.7 per cent against the dollar this year. It will weaken another 1.4 per cent in the first quarter of next year, according to the median of estimates in a Bloomberg survey. The government has been spending its international reserves to slow the yuan's fall. Beijing's foreign currency holdings, the world's largest, fell in November by the most since January after the yuan declined to an eight-year low.

"Investors have realised that the yuan has become a uni-directional play, so they are looking to hedge themselves," said Mr Keith Pogson, a Hong Kong-based managing partner at Ernst & Young. "It is more subtle than the 'I want to get my money out of China' dilemma that you have had previously."

Banks dangle attractive yields to keep depositors from fleeing to the competition, said Mr Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. "It's like prisoner's dilemma," he said. "If you don't offer a higher return, other banks will, and your customers will leave."

To be sure, foreign-currency denominated WMPs remain a small portion of the nation's 26.3 trillion yuan (S$5.46 trillion) market for wealth management products. And the yields offered aren't attractive enough to prompt the savers to convert their holdings from yuan, said Wei Jiyao, an analyst at PY Standard. Rates paid on yuan are around 3.5 per cent to 4 per cent.

Instead, the target base is those who already hold dollars. "People with dollars on hand also need a way to preserve their value, so low-risk dollar WMPs become their top choice," Wei said.