Hong Kong savers seek yuan
protection By Olivia Chung
HONG KONG - The strength of the Chinese
currency, the yuan, and higher bank interest rates
are prompting a growing number of people in Hong
Kong, Macau and even Taiwan, where the currencies
are distinct from the mainland's, to open
mainland-based savings accounts.
Hong Kong
residents, faced with the falling value of the
Hong Kong dollar due to its peg to the US dollar,
are the most aggressive in cashing in on the
yuan's rise. Their pursuit of improved returns is
now being helped by banks such as HSBC that are
providing one-stop services for them to open yuan
accounts with mainland branches.
Previously, Hong Kong residents had to
cross the border to
neighboring Shenzhen to
open accounts that could catch gains from the
strengthening yuan and higher interest rates
available in the mainland.
Macau
residents, also frustrated with the almost zero
savings interest rates in their local currency,
the pataca, are converting their money into yuan
and sending it to the mainland for deposits.
Taiwanese have less reason to turn to the
mainland currency given the island's relatively
strong currency and the reluctance of lenders to
do yuan business with the public for political
reasons. Even so, some see the improved political
relationships between the island and Beijing as
good enough reason to park money in mainland
accounts.
The yuan is not fully
convertible and the mainland still controls money
flows, so investors cannot freely trade the yuan
through banks or money exchanges in the
neighboring regions, such as Hong Kong, Macau and
Taiwan.
Despite the restrictions, Hong
Kong and Macau investors can bet on a
strengthening yuan by opening yuan accounts either
in their home cities, where they garner little in
the way of interest, or on the mainland.
Hong Kong banks, which had recognized that
customers were withdrawing cash to physically
carry it across the border to deposit it with
mainland banks, are now helping customers transfer
their savings. The service appears to conflict
with mainland regulations that require local
customers to be present when opening accounts, but
that has not prevented more banks offering such
services.
Following HSBC, Hang Seng Bank
and China Merchants Bank, the Bank of East Asia
(BEA) and ICBC Asia are helping customers open
yuan accounts on the mainland via Hong Kong
branches. Standard Chartered, Chong Hing Bank and
Dah Sing Bank have announced their intentions to
provide a similar service soon.
Among
hundreds of investors joining the yuan ride, a
50-year-old man surnamed Chang opened three
mainland yuan accounts through three different
Hong Kong banks.
"I am determined to
convert most of my savings into yuan," said Chang.
"Given that yuan exchange in Hong Kong is limited
to 20,000 yuan a day, the three new yuan accounts
are just enough for me to do this."
Chang,
plays the stock market, said stock market
volatility was one incentive behind his move.
"I am really scared of the stock market
now. In recent months it has gained 300 points a
day and fallen more than 1,000 points the
following day. No one can see through the stock
market and a yuan account is an alternative exit
for my savings given expectations that the yuan
will continue to appreciate," he said.
The
yuan has gained more than 15% against the US
dollar since the peg with the American currency
was abandoned in July 2005 and tied instead to a
basket of currencies. It rose by 4.4% in the first
quarter of 2008.
The yuan could rise as
much as 15% to 6.35 to the US dollar at the end of
the year, according to Frances Cheung, a
fixed-income strategist at Standard Chartered Hong
Kong. The yuan was trading at 6.987 on May 2,
compared with 7.0100 a week earlier.
Recent interest rate cuts by Hong Kong
banks have given residents added incentive to send
their savings across the border. In March, the
city's lenders cut their deposit rates by up to 50
basis points, bringing savings' rates to as low as
0.01%. Many banks already pay no interest on
deposits below HK$5,000 (US$640).
Currently, interest rates for yuan
deposits held in Hong Kong are between 0.4% and
0.8% per annum. Rates on the mainland can approach
5%. A Bank of East Asia Hong Kong-based yuan
account, for instance, offers a 0.68% interest on
a three-month deposit, while the annualized rate
for three-month deposits offered by BEA's Shenzhen
branch across the border is 3.33%.
"Even
deducting the interest income tax of 5% on the
mainland, the annualized return on a three-month
deposit stands at about 10%, assuming an annual
appreciation of 10%. This is more than enough to
beat inflation, which has heavily eroded savings,"
Chang said.
Hong Kong's underlying
inflation rate rose to a 10-year high of 5.3%
year-on-year in March from 5.1% in February.
Michael Bushanan and Hong Liang, analysts
at Goldman Sachs, offered support for residents
looking to get better returns on their savings in
a research note on April 21. "... the weakening
trend in the US dollar also exacerbated the
imported inflationary pressure on Hong Kong ...
Therefore, inflation expectations are likely to
remain unanchored," they wrote.
A 10%
depreciation in the US dollar against all
currencies would cause domestic prices to rise by
0.82% in the short term and 1.61% in the medium
term, according to a Hong Kong Monetary Authority
working paper titled "Exchange Rate Pass-through
to Domestic Inflation in Hong Kong" published last
month.
Yuan deposits in Hong Kong
increased 21% in March to 57.6 billion yuan
compared with a month earlier. That is up 72% from
33.4 billion at the start if the year, according
to the Hong Kong Monetary Authority (HKMA).
HKMA chief executive Joseph Yam earlier
attributed the rising yuan deposits in Hong Kong
to bearish stock market sentiment, expectations
for further appreciation of the yuan and the lower
interest rates offered on the Hong Kong dollar
compared with mainland yuan deposits.
In
Macau, high inflation is also prompting residents
to turn to the yuan and away from the negative
real interest rates on their local deposits. The
consumer price index (CPI) increased 9.49% in
March and 9.09% in the first quarter, both the
highest since 1991, according to the former
Portuguese enclave's Statistics and Census Service
in Macau.
"With the pataca deposit rate
close to 0%, we are losing money if we put our
savings into banks when inflation is factored in,
so my wife and I opened yuan accounts in Zhuhai
[in neighboring Guangdong province]," said a
48-year-old man.
The yuan has appreciated
about 13% against the pataca as of the end of last
month since July 2005. The market is expecting an
annual appreciation of 9%.
A Macau bank
worker who preferred to remain anonymous said the
yuan exchange service at her bank grew more than
230% in the first two months this year while the
amount of yuan deposits increased 110%.
"The bank's cross-border yuan remittances
to its clients' mainland accounts has grown by
about 300% in the first two months of the year,"
she said.
Not all Macau residents are
prepared to risk putting all their money into
mainland accounts. One, named Chan, who has steady
rental income at Gongbei in Zhuhai, said he was
not converting his pataca savings to yuan.
"As yuan appreciation has picked up, I am
reluctant to use [yuan rental income], so I put
that into my yuan account at a mainland bank in
Zhuhai. But I have not considered converting my
pataca savings to yuan as Macau banks usually
charge a fee for remittance and the reputation and
service of the mainland banks are just so-so," he
said.
In Taiwan, a general manager at a
computer company, surnamed Tsai, said he parked
some of his salary in yuan using underground
banks. "For the past few years, no problem has
been found in using underground banks, which don't
adhere to conversion limits and offer higher
exchange rates," he said.
The strong
Taiwan currency inhibited from moving more money
into yuan. The NT dollar, which appreciated the
most of Asian currencies in the first quarter
compared with the US dollar, is at its strongest
against the US dollar since 1997. It was boosted
by confidence that the victory of Kuomintang
candidate Ma Ying-jeou's in the March 22
presidential election will lead to closer
cross-Taiwan Strait economic ties and increased
business opportunities. The NT dollar gained 7.29%
against the US dollar in the first quarter.
Expecting further appreciation of the
Taiwan currency, "there's no need for me to
convert my money into yuan," Tsai said.
His wife, on the other hand, intends to
keep in the mainland yuan savings she has held
since she helped manage a spa there a decade ago.
"I opened a yuan account 10 years ago, and
now the value of the money has risen by 20%," she
said. She said along with friends considering
opening such accounts more currency gains will
come following Ma's election, which "may lead to
relaxation of cross-strait business restrictions
and liberalization of exchange regulations"
regarding Taiwan and mainland currencies.
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