HK dollar shunned as traders chase higher yuan yields

HONG KONG • The big ball of money in Hong Kong is rolling to the yuan, and the local dollar is suffering. After years of underperforming, the offshore yuan is near its highest level versus the city's currency in more than 12 months. 

Yuan deposits in the former British colony have stabilised after halving in the past two years, while buying mainland bonds is more lucrative. Benchmark 10-year China government debt yields more than twice as much as its counterpart in Hong Kong.

"The market is trying to look for opportunities for carry, using yuan as the long currency, because of its higher yield compared with Hong Kong-dollar or US-dollar products provided in the city," said Ms Iris Pang, an economist at ING Groep.

If the yuan's advance continues, there will be "a lot of such carry activities" across the border in the coming year, she said.

The yuan climbed 5.3 per cent against the Hong Kong dollar last year after a 13 per cent slide over the last three years. The city's currency has been weighed by a wider interest-rate discount to that of the US dollar, and it is down nearly 1 per cent against the greenback year to date, passing the mid point of its HK$7.75-HK$7.85 trading band. The Philippine peso is the only other major Asian currency to weaken against the greenback in that period.

The Hong Kong dollar was down 0.14 per cent at HK$1.1710 per offshore yuan as of 10.20am local time yesterday. Lenders in Hong Kong may have sold up to HK$112 billion (S$19.1 billion) of the local currency into US dollars and converted that into yuan in the first four months of last year, according to Bank of America Merrill Lynch.

Hong Kong banks are deploying most of their yuan funds as loans, Mr Ronald Man, a North Asia rates and foreign-exchange strategist at BofAML, wrote in a note. If they continue to sell the local currency, money market rates will remain elevated, forward points will turn more negative and the spot exchange rate will come under further pressure, he said. He expects the Hong Kong dollar to end this year at HK$7.83, compared with HK$7.82 now.

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A version of this article appeared in the print edition of The Straits Times on August 18, 2017, with the headline 'HK dollar shunned as traders chase higher yuan yields'. Print Edition | Subscribe