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CNH Tracker-Offshore yuan products under scrutiny after sharp yuan fall

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Post by Ponee Thu Mar 20, 2014 11:57 am

CNH Tracker-Offshore yuan products under scrutiny after sharp yuan fall
Thu Mar 20, 2014 5:45am EDT
 
 
    HONG KONG, March 20 (Reuters) - The dramatic fall of the
Chinese currency after last week's widening of its trading band
has put the thriving offshore yuan-structured product business
under pressure, prompting regulators in South Korea and Taiwan
to scrutinize it.   
 
 
    The probes shine show how much the one-way bet on the yuan
strengthening has grown in recent years, either through rapid
expansion of offshore yuan deposits or via complicated
structured products.  
 
 
    South Korea's authorities are inspecting units of three
China banks -- Bank of China Ltd., Industrial and
Commercial Bank of China Ltd. and China Construction
Bank Corp -- over a spike in yuan holdings,
according to regulatory sources.
 
 
    Yuan deposits by local residents in South Korea stood at the
equivalent of $7.62 billion at end-February, more than eight
times that at end-September, data from its central bank showed.
 
 
    On Thursday, Taiwan media reported the island's financial
regulators are checking seven banks to see if they properly
advised clients about potential risks of currency investments
after receiving complaints about losses related to the yuan's
fall.
 
 
    According to bankers, some of the diversified yuan products
are leveraged bets that were designed to hedge foreign-exchange
risks for exporters, but have been sold to individual investors
who have no corporate needs.
 
 
    "Most of the yuan products sold in the past few years are
betting on yuan appreciation. The sudden weakness of the
currency has put these yuan-structured products such as target
redemption forwards under huge pressure," said a treasurer at a
Chinese bank in Hong Kong. (For related story,
see )
 
 
    "Taiwan is quite aggressive in selling such products, while
the genuine demand is not that much," he said.  
 
      
    A rise in cross-border yuan trade settlement has been
another factor driving a swelling of the offshore yuan pool.
 
 
    The strength of the "redback" during the past four years has
spurred growth in yuan deposits from Hong Kong to Singapore, as
companies hungry for yuan assets gladly accepted payments from
their mainland trade counterparts.
 
 
    But after a more than 30 percent rise against the U.S.
dollar since 2005, the yuan has fallen nearly 3 percent this
year, raising concerns that attractiveness of yuan assets may
falter.
 
 
    There are some early signs that China's capital inflows are
slowing. Foreign direct investment (FDI) rose only 4.1 percent
in February from a year earlier, compared with a 16.1 percent
increase in January.
 
 
    The yuan's weakening also casts a shadow over the
mushrooming yuan deposits in Hong Kong and trade settlement
denominated in the Chinese currency. Cross-border yuan trade
settlement hit a record in January, according to the Hong Kong
Monetary Authority.
 
 
    The growth of the yuan trade settlement programme in Hong
Kong is "supported by robust infrastructure and risk management
of the banks", the Hong Kong Monetary Authority said on
Thursday.
 
 
    From nearly zero in 2009, the proportion of China's trade
conducted in yuan swelled to more than 16 percent last year.
    While that rise in trade has been accompanied by a jump in
offshore yuan deposits, market watchers are hoping the yuan's
recent volatility would prompt genuine trade participants to use
the programme, rather than speculators masking arbitrage flows.
 
    "The roots of the yuan trade settlement programme were laid
in arbitrage and the recent currency volatility is likely to
lead to more sustainable growth," Hu Beihai, an assistant
general manager at Bank of China said last week at an event
hosted by ASIFMA, an industry body.   
          
    WEEK IN REVIEW:   
    * JP Morgan Asset Management said on Monday it had added a
share class hedged to renminbi to its Asia Equity Dividend Fund,
to meet growing demand for renminbi-denominated investment
products.
 
 
    * IFC, a member of the World Bank Group, said on Wednesday
it raised another 1 billion yuan to double the amount of its
first London-listed yuan bond. The order book topped 3 billion
yuan, with more than 90 percent of the investors coming from
outside Asia.
 
 
    * Taiwan's yuan deposits amounted to 247 billion yuan
($39.86 billion) by the end of February, up 15.2 percent from
the previous month, according to Taiwan's central bank.  
 
  
    * China has allowed currency traders to directly trade the
yuan for the New Zealand dollar, the central
 
 
bank said on Tuesday, a move that lowers transaction costs for
selling and buying of the two currencies.
 
 
    * The Monetary Authority of Singapore (MAS) said deposits
hit 200 billion yuan at the end of December. Helping lift the
business in 2013 was the appointment of Industrial and
Commercial Bank of China  as China's
official clearing bank for the currency in Singapore.
   
   
   CHART OF THE WEEK:
 
 
   China has signed a series of bilateral currency agreements in
the past four years to promote the use of the yuan in trade and
investment: link.reuters.com/fuf67v
 
        
   http://www.reuters.com/article/2014/03/20/markets-offshore-yuan-idUSL3N0MH0Z520140320
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