Yuan deposits in Taiwan that surged fivefold in the past year are mostly sitting idle, according to global banks who say more investment options are needed to make the renminbi a global currency.
Credit Suisse Group AG estimates that about half of the 268 billion yuan ($43 billion) of savings on the island are re-deposited at Bank of China’s Taipei branch, while only 7 percent is used for loans. The territory’s sales of yuan notes, known as Formosa bonds, were 1.5 billion yuan this year, while Taiwan has yet to receive a qualified investor quota allowing it to invest the funds in China’s onshore market.
“Many banks were very proactive in building up a liquidity pool in the shortest time, betting that there will be a corresponding regulatory development in the end,” said Raymond Yeung, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “The critical question is how to deploy the huge amount of deposits sitting on only one side of the balance sheet.”
Taiwan’s case shows the difficulty global financial centers including London, New York and Singapore will have in making full use of yuan deposits as China’s government takes an ad hoc approach to lifting capital controls. While Asia’s largest economy is seeking to boost the global role of the yuan, foreign investors must apply for quotas to invest in onshore bond and stock markets.
Taiwan started taking renminbi deposits in February 2013 following a clearing agreement signed in the preceding year. Singapore and London joined the competition for yuan business as China signed currency-swap lines with at least 20 foreign central banks and allowed the yuan to trade directly against major currencies such as the yen.
While China has agreed to let Taiwan participate in the Renminbi Qualified Foreign Institutional Investor program, or RQFII, the island’s quota is conditional on the passage of a trade deal with its neighbor, which was shelved following widespread protests last month. The two sides of the Taiwan Straits have been governed separately since a civil war in 1949.
“If, by the year-end, China still hasn’t opened up RQFII to Taiwan or helped Taiwanese banks invest their yuan, they will face a serious bottleneck,” said Chung Hsu, a Taipei-based banking analyst at Credit Suisse.
China has allocated 580 billion yuan in RQFII quotas globally, including a planned 100 billion yuan for Taiwan, while yuan deposits reached about 1.5 trillion yuan around the world in March, according to a Standard Chartered Plc estimate.
The onshore yuan has depreciated 2.8 percent this year, reversing much of 2013’s 2.9 percent gain, which was the biggest rise in Asia. It strengthened 0.5 percent last week to close at 6.2280 per dollar in Shanghai.
While Taiwanese banks initially lured yuan funds with high deposit rates, these are beginning to show signs of falling. Bank SinoPac, for instance, is offering an annualized 3.2 percent for three-month time deposits. When it first launched its yuan business in February, it paid 6.66 percent, according to Economic Daily News.
“The availability of local assets seriously lags the speed of deposit growth, so that’s going to eventually curb the growth of Taiwan’s deposits,” said Becky Liu, a Hong Kong-based strategist at Standard Chartered.
Taiwan’s yuan debt market has seen few offerings this year as its low trading activity deters investors, while the scarcity of paper means yields are slightly lower than Hong Kong’s Dim Sum bonds. Only 10 of 15 Formosa notes were traded in the secondary market in the last four months, according to GreTai Securities Market, the island’s only bond exchange. Debt sales by Chinese firms are also subject to a 10 billion yuan limit, 6.7 billion yuan of which has been used.
“The Formosa bond market isn’t active enough and banks’ lending in renminbi needs to catch up,” said ANZ’s Yeung, referring to the yuan by its official name. “Even for Hong Kong, this is an issue.”
In Hong Kong, which started taking offshore yuan savings in 2004, local banks have also had trouble using their 945 billion yuan of deposits, ANZ wrote in a May 5 note. The ratio of yuan deposits to lending is seven to one, it estimated.
Offshore yuan loans represent 6 percent of funding among companies doing business with China on average, according to a Standard Chartered survey discussed in a May 7 report. The respondents cited difficulties in remitting funds and higher interest rates.
“Ultimately, the funds have to return to China and be re-invested in companies,” said Forest Chen, a Taipei-based economist at Ta Chong Bank Ltd. “This is how there can be an interest return. With yuan deposit rates at around 3 to 3.5 percent in Taiwan, banks aren’t making that much money at current Bank of China rates.”
Rates at Bank of China’s Taipei branch, the island’s yuan clearing house, are falling as cash conditions improve onshore. The lender’s one-year rate was 3.6 percent on May 9, compared with February’s record 4.3 percent. The one-year interbank rate is 2.91 percent in Hong Kong, according to a fixing from the Treasury Market Association.
Taiwan’s yuan deposits have reached a “significant” enough size to justify expanding the Formosa bond market, deputy central bank governor Yang Chin-long said last month. Sales this year are far short of GreTai’s target of 12 to 16 billion yuan for 2014, compared with 10.6 billion yuan last year.
“Growth in yuan deposits has exceeded the growth in yuan assets,” said Linan Liu, a rates and foreign-exchange strategist at Deutsche Bank AG in Hong Kong. “Two things have to happen. One, China has to liberalize its capital account, hopefully to offer more renminbi investments to holders of offshore liquidity. Second is we need more offshore issuance of yuan bonds, certificates of deposit, equities and other types of yuan-denominated financial products.”
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