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Yuan slump turns Hong Kong into a haven as mainland China rushes for higher bank rates, insurance policies and US dollar

The Chinese yuan has weakened to near its lowest level since October this year, with many mainland citizens rushing to Hong Kong for safety in higher-yielding bank deposits, insurance and investment products, and the US currency.

Beijing’s Shi was at the Bank of China (Hong Kong) branch in the city’s tourist hot spot, Tsim Sha Tsui, at 7:30am on Friday to open a bank account. He had decided to queue there because the online appointments in other branches were already fully booked. As the 9am opening time approached, more than 30 people had made their way to the door.

“I plan to buy insurance policies for my children in Hong Kong,” said Shi, who asked to be identified only by his last name. “I am also considering buying some US and Hong Kong dollars due to the recent depreciation of the yuan and rising interest rates in Hong Kong.”

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In the same row, Chen from Suzhou in Jiangsu province said he was looking for an insurance policy to diversify his investments. “You shouldn’t put all your assets in one basket, that’s why I came here.”

China’s economic health deteriorated in June and July, with trade, inflation and credit falling, while domestic and international demand contracted. The country is facing a crisis of confidence as its piecemeal approach to reviving growth disappointed investors and put pressure on the currency.

The yuan has lost 5.4 percent of its value against the US dollar this year and 7 percent over the past 12 months. Offshore interest rates fell to a nine-month low of 7.3451 per US dollar on Thursday, according to Reuters, while the onshore yuan hit its lowest level since November at 7.3008 per dollar.

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Foreign investors pulled $7 billion from onshore stocks this month, Goldman Sachs said. The Bank of Wall Street forecasts the yuan will weaken to 7.2 per dollar by the end of 2024, from 6.98 per dollar at the end of 2023, according to reports to clients this week.

Pedestrians walk past HSBC’s logo outside a local bank branch in Hong Kong in August 2021. Photo: AFP alt=Pedestrians walk past the HSBC logo outside a local bank branch in Hong Kong in August 2021. Photo: AFP>

Hong Kong commercial banks like HSBC are dangling lucrative incentives to attract more customer deposits as the cost of borrowing between lenders in the interbank market has skyrocketed. Others have offered Sunday banking to accommodate mainland customers.

HSBC offers up to 10 percent rates on deposits for new high net worth customers, while other rival lenders offer 4 to 8 percent on new deposits. Banks in mainland China currently pay around 1.25 percent to 1.65 percent annually on comparable term accounts.

New life insurance sales in Hong Kong to mainland Chinese visitors rose 28-fold in the first quarter to HK$9.61 billion (US$1.23 billion) from a year earlier, according to data published by the Insurance Authority.

“More mainland customers will come to Hong Kong to exchange their yuan for Hong Kong dollar or US dollar deposits or to buy investment products in these currencies as a hedge,” said Jasper Lo, an independent currency analyst. “Investors can enjoy higher interest rates offered by Hong Kong banks and potential currency gains. It’s a good diversification strategy.”

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Jasper Lo, an independent currency analyst, says more mainlanders will try to hedge against the yuan’s weakness. Photo: Dickson Lee alt=Jasper Lo, an independent currency analyst, says more mainlanders will try to hedge against yuan weakness. Photo: Dickson Lee>

Under China’s capital controls, mainland residents are limited to transferring $50,000 abroad annually, according to consultancy Horizons. Overseas ATM withdrawals are limited to 100,000 yuan per person per year. Local and foreign travelers can carry 20,000 yuan in cash in and out of China, while higher amounts require more documentation, it said.

Lo thinks there is room for the yuan to depreciate to 7.50 yuan per dollar in the medium term. However, the Chinese currency is unlikely to reach a “panic level” of 7.80 per dollar. The last time the yuan reached parity with the Hong Kong dollar was in 2007, before the global financial crisis.

“Beijing is certainly sensitive to it [yuan] volatility after a few months of relatively rapid depreciation,” said Nomura economists, including Lu Ting. “Beijing fears that a continued depreciation will cause even greater capital outflows, which would hurt domestic consumption and investment.”

Property prices in number one cities such as Shanghai and Shenzhen are falling, due in part to high net worth individuals trying to sell their homes there and taking the money abroad, they said in a report on Friday.

“These efforts have been successful,” said a BEA spokesperson. “In particular, the inflow of new cross-border customers in the first half is higher than before Covid-19.”

The number of new accounts opened by cross-border customers of the Bank of China (Hong Kong) rose five times from a year earlier in the January to April period. It was also 44 percent higher than the same period in 2019.

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In the Greater Bay Area, new accounts opened by clients with Standard Chartered between January and June have surpassed the 2022 total, the bank said. At HSBC, new nonresident bills in the second quarter were double the level in the same period of 2019, it said.

The number of new accounts for Mainland China clients at OCBC Hong Kong has increased 12 times in the first half of this year compared to the same period in 2022. They aim to diversify their assets, access international markets and foreign exchange opportunities, said a spokesman for the bank.

DBS Bank (Hong Kong), part of Singapore’s largest lender, has seen an average monthly increase of 60 percent in new account openings this year, compared to pre-pandemic levels, said Amy Kwan, executive director of the consumer banking group.

“Individuals from mainland China who frequently travel to Hong Kong for personal or business purposes may find it helpful to have a local bank account,” she said. “It can facilitate day-to-day banking, such as withdrawing money, exchanging currency, and paying for their children’s foreign education and tuition.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, explore the SCMP app or visit SCMP’s Facebook page Twitter Pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.

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