Yuan Deposits Fall in Hong Kong on Signs Appreciation Halting

By Judy Chen

Oct. 23 (Bloomberg) -- Hong Kong residents are cutting their holdings of yuan as China checks the currency's appreciation to shield exporters from a global slowdown.

The city's deposits in the Chinese currency slid 8 percent to 71.1 billion yuan ($10.4 billion) in August, the biggest monthly drop since February 2004, according to data on the Web site of the Hong Kong Monetary Authority.

``The halt in appreciation has damped the city's passion for the yuan,'' Andrew Fung, general manager at Hang Seng Bank Ltd., Hong Kong's second-largest lender by assets, said in an Oct. 17 interview. ``As there are no more gains, residents prefer deposits in the Hong Kong dollar whose deposit rate is higher than that of the yuan.''

The Chinese currency strengthened against the U.S. dollar every month but one in the three years after a fixed exchange rate was scrapped in July 2005, encouraging investors to hold the yuan to benefit from currency gains. It fell in each of the last two months as policy makers indicated they would favor a stable currency to help the economy, which expanded in the third quarter at the slowest pace in five years.

Paper notes transferred out of the mainland to Hong Kong through the customs fell 56 percent in the third quarter to 3.2 billion yuan, the China Securities Journal reported on Oct. 15, citing data from the Shenzhen border customs.

Hong Kong's dollar has a fixed-exchange rate to the U.S. dollar, trading 5 cents either side of HK$7.8. It was little changed at HK$7.7539 as of 2:44 p.m. today.

Weaker Yuan

The yuan fell to 6.8352 per dollar in Shanghai from 6.8341 late yesterday, headed for its weakest close in more than a week. Since scrapping its own dollar peg, China has managed the yuan's exchange rate versus a basket of currencies including the euro, the yen and South Korea's won.

As Hong Kong's demand for yuan diminishes, ``more money will come from the existing yuan deposit accounts rather than new currency conversions when Chinese banks sell yuan- denominated bonds next time,'' said Fung. He predicts the yuan will trade between 6.69 and 6.87 against the greenback in the next 12 months.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net