Hong Kong residents are cutting their yuan holdings as the central government checks the currency's appreciation to shield exporters from a global slowdown.

The city's deposits in renminbi slid 8 percent to 71.1 billion yuan in August, the biggest monthly drop since February 2004, according to information on the Hong Kong Monetary Authority website.

"The halt in appreciation has dampened the city's passion for the yuan," said Andrew Fung, a general manager at Hang Seng Bank, Hong Kong's second-largest lender by assets. "As there are no more gains, residents prefer deposits in the Hong Kong dollar, whose deposit rate is higher than that of the yuan."

Renminbi strengthened against the US dollar every month but one in the last three years, after a fixed exchange rate was scrapped in July 2005, encouraging investors to hold the yuan to benefit from currency gains. It fell in each of the last two months as policy makers indicated they would favor a stable currency to help the economy, which expanded in the third quarter at its slowest pace in five years.

Paper notes transferred from the mainland to Hong Kong through customs fell 56 percent in the third quarter to 3.2 billion yuan, the China Securities Journal reported on Oct 15, citing data from the Shenzhen border customs.

Hong Kong's dollar has a fixed-exchange rate to the US dollar, trading 5 cents over or under HK$7.80. It was little changed at HK$7.7539 yesterday afternoon.

The yuan fell to 6.8352 per dollar in Shanghai from 6.8341 late yesterday, headed for its weakest close in more than a week. Since scrapping its own dollar peg, the central government has managed the yuan's exchange rate versus a basket of currencies including the euro, the yen and South Korea's won.

As Hong Kong's demand for yuan diminishes, "more money will come from the existing yuan deposit accounts rather than new currency conversions when mainland banks sell the yuan-denominated bonds next time," Fung said. He predicts the yuan will trade between 6.69 and 6.87 against the greenback in the next 12 months.

Bloomberg

(HK Edition 10/24/2008 page3)