CNH Tracker-Offshore yuan products under scrutiny after sharp yuan fall The dramatic fall of the Chinese currency after last weeks 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 Koreas 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 islands 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 yuans 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 Chinas 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 yuans 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 Chinas 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 yuans 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.
Posted on: Thu, 20 Mar 2014 11:05:20 +0000
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