Yuan deposits in S Korea rise most in July on higher rates

Yuan deposits in South Korea rose the most last month as local branches of Chinese banks raised deposit rates amid stronger demand from financial institutions caused by expectations for policy rate cuts, central bank data showed Tuesday.

Deposits denominated in the renminbi increased 4.22 billion U.S. dollars in July, the largest monthly growth since the Bank of Korea (BOK) compiled related data, according to the BOK.

The monthly growth was equivalent to nearly 80 percent of a 5.3 billion dollars rise in the first half of this year.

As of the end of July, yuan deposits came to 16.19 billion dollars, accounting for 25.9 percent of the total foreign currency deposits.

The portion continued to advance from 0.5 percent at the end of 2012 to 13.8 percent a year later, before surging to 25.9 percent as of end-July.

Last month's surge in yuan deposits came as local branches of Chinese banks lifted yuan deposit rates by 0.4-0.5 percentage points.

"Branches of Bank of Communications raised deposit rates in June, and then Bank of China followed the lead in July. Branches of other three Chinese banks followed the suits," said an official at a domestic financial institution.

Local financial institutions tended to fund the home currency through issuance of asset-backed commercial paper (ABCP), before exchanging the currency for the U.S. dollar at the FX swap market in Seoul.

The institutions used to sell the dollar funds to get yuan funds at the FX swap market in Hong Kong. Differences in the swap rates between Seoul and Hong Kong caused losses to the institutions, but they can recover the losses thanks to higher rates of yuan deposits.

"Yuan deposit rates in offshore markets are much lower than those in the mainland of China, so the lifting of deposit rates in Seoul will guarantee interest margins for Seoul branches of Chinese banks if they run the yuan funds in the mainland," an official at a Seoul branch of a Chinese bank said by phone.

The official said expectations for the BOK's rate cuts this week appeared to affect the largest monthly expansion in yuan deposits here.

The BOK was widely expected to lower its benchmark interest rate by a quarter percentage point to 2.25 percent during the August monetary policy meeting scheduled for Thursday.

The rate cuts would reduce incentives for local financial institutions to deposit surplus cash into local banks, while driving them further to deposit accounts at Seoul branches of Chinese banks.

Average rate of one-year deposit at local banks was in early 2 percent, while those provided by Seoul branches of Chinese banks averaged 3.7-3.8 percent.

The continued growth in yuan deposits was expected to lower the percentage of U.S. dollar deposits further. The dollar deposits took up 64.5 percent of the total as of end-July, down from 74 percent at the end of 2013 and 82 percent a year earlier.