Hang Seng Bank said it will raise its yuan prime rate significantly to 4 percent from 3 percent beginning next month to meet the rapidly rising yuan capital costs in the city.

"The move was to reflect the changes of market conditions in Hong Kong," Hang Seng Bank said in a statement on Tuesday, explaining that the rising CNY Hong Kong Inter-bank Offered Rate (HIBOR) together with the increasing yuan deposit rates, have led to a higher capital cost for banks.

The CNY HIBOR has been rising since the beginning of this year, for instance, the overnight interest rate has risen by over 100 basis points from January to August in 2012, said the bank.

"Hang Seng Bank will continue to monitor the market situation, and the yuan prime rate will be adjusted again when needed," it said.

After Hang Seng Bank made its announcement, HSBC Hong Kong said it will closely monitor the market trends, but the bank currently has no intention to adjust its rates, mainly because it did not see a major shift in its yuan capital flow.

Wing Lung Bank also told China Daily that it will stay put for now and will monitor the market condition for a while before it makes a decision about whether or not to raise its yuan lending rate.

Ivan Chung, Moody's senior analyst, told China Daily that not necessarily all banks in Hong Kong would increase their lending rates, as some of them may want to increase their market share after Hang Seng Bank hikes its rates.

"But since the cost of capital has been increasing in Hong Kong, the banks which do not raise their lending rates will see their interest margin squeezed," said Chung.

Peter So, managing director of research division at CCB International, told China Daily that Hong Kong people are reluctant to deposit their money (yuan and Hong Kong dollar) in banks due to the rising inflation.

"Banks in Hong Kong have been hiking their yuan deposit rates since the second quarter of this year to attract deposits," said So, adding that since the capital cost for banks has increased, they had to raise their lending rates.

According to local news report, Hang Seng Bank offers 3.88 percent annualized interest rate to clients who convert Hong Kong dollars into 20,000 yuan ($3171.48) in one transaction for a two-week tenor; while Wing Lung Bank told China Daily that it pays 2.8 percent per annum for a minimum 20,000 yuan new fund deposit for one year.

But So believes it is unlikely the offshore yuan deposit and landing rates will rise in the future, as currently the central government in China is relaxing its monetary policy, which means it is easier now than before for corporations in the mainland to obtain credit from domestic banks.

"The mainland companies will have less reason to raise funds in Hong Kong if the lending rate is not that different from each other," said So.

Paul Pong Po-lam, managing director of Pegasus Fund Managers Limited, who holds a view similar to So, told China Daily that banks in Hong Kong had no choice but to raise the yuan deposit rates to lure deposits.

He explained that the increasing number of mainland companies which issued yuan bonds in Hong Kong had boosted the yuan demand in the city, while the amount of yuan deposits in Hong Kong has been dropping, putting banks in a difficult position.

sophiehe@chinadailyhk.com

(HK Edition 09/26/2012 page2)