Capital inflows increase as yuan appreciates

Because the yuan has been trading at a record-high level recently, there have been more capital inflows into the Chinese currency because of its prospects for further appreciation and higher interest returns in mainland banks.

Retail investor Andrew Wong said some of his friends from Hong Kong who work on the mainland have deposited in mainland banks to earn a better return rather than convert the cash into Hong Kong dollars.

Wong said that he missed the yuan's recent upward trajectory as he was not eager then to allocate his assets in the yuan.

"However, for the sake of a better asset allocation, I may purchase more yuan when the currency shows a reasonable downward correction," Wong added.

Wong is just one of the retail investors in Hong Kong who has been persuaded to join the yuan appreciation betting game because of the currency's recent rally against the US dollar. The yuan has strengthened 2.3 percent against the dollar since July 25, when the yuan was at its weakest against the dollar in 13 months.

A better rate of investment return is another reason more people are holding onto yuan.

Mainland banks' deposit interest rates are generally higher than those in Hong Kong thanks to the interest-rate liberalization process on the mainland.

Currently, some medium-sized mainland lenders have raised the 12-month deposit rate to 3.575 percent.

In Hong Kong, HSBC Holdings Plc said its six- and 12-month interest rates for new yuan funds above 20,000 yuan ($3,200) will be raised to an annual 3.1 percent and 3.2 percent.

For Bank of China Ltd, the annualized three-month deposit rate will rise to 3 percent for new funds or yuan converted from other currencies between Oct 4 and Oct 31.

Local yuan deposit interest rates are also rising because of the shrinkage of the yuan liquidity pool in the city as a result of the expansion of other yuan currency repatriation channels. According to the Hong Kong Monetary Authority, yuan deposits decreased 1.9 percent month-on-month to reach 552.3 billion yuan in August this year.

"As overseas capital inflows are accelerating amid the launch of the various quantitative monetary easing policies, the capital inflows will search for interest returns, and the yuan currency will become one of the preferred assets," said David Leung, a wealth portfolio manager at Centaline Holdings Ltd.

Though the yuan may be more popular as an investment tool for investors, foreign-exchange analysts cautioned that it may face some minor downward correction.

"The yuan may rise another 1 percent by the end of this year given the recent launch of quantitative monetary easing policies that have encouraged capital inflows into the mainland and Hong Kong," said Cheung Woon-chuen, president of Emperor International Exchange (Hong Kong).

"However, the yuan may also witness some minor downward pressure because any more drastic fall in the US index may trigger capital outflows in the near future," Cheung added.