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Bank of China raises fees for HK dollar trades

(Agencies)
Updated: 2008-05-08 11:49

Bank of China Ltd, the only yuan clearing bank in Hong Kong, said it raised transaction costs for conversions between the city's currency and the yuan more than sevenfold.

Bank of China's Hong Kong branch widened the spread between the cost of buying and selling Hong Kong dollars for the mainland currency to 0.75 percentage point from 0.10 point on May 5, said Clarina Man, spokeswoman at the bank. Hong Kong has stuck with a peg of about HK$7.8 to the dollar that began in 1983, eroding the value of its residents' savings as the US currency slumped.

The yuan has risen about 19 percent against the Hong Kong dollar since the People's Bank of China scrapped a dollar link in July 2005, allowing the yuan to reflect the prospects for expansion in the world's fastest-growing economy. China's foreign-exchange reserves rose to a record $1.68 trillion at the end of March, fueling concern inflows of cash will hamper the government's efforts to damp inflation close to the fastest in 11 years.

"This is clearly a transaction tax on the conversion of Hong Kong dollars into yuan," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "In concert with the significant slowdown in the pace of yuan appreciation, it reveals a real official concern with hot money inflows and speculative demand for the yuan."

The yuan traded at 6.9867 as of 4:02 pm in Hong Kong, compared with 6.9873 yesterday, according to the China Foreign Exchange Trade System. The yuan's appreciation has slowed since the start of April, after gaining 4.2 percent in the first quarter. The yuan bought HK$1.1159, compared with HK$1 in January last year.

Stuck With Peg

The Hong Kong branch of the Bank of China raised its interbank fees on the same day that the China Foreign Exchange Trading System, the country's trading platform, increased transaction fees, according to spokeswoman Man. She wouldn't give details.

Most Hong Kong lenders said they would pass on the additional cost of converting the currency to customers, according to Hong Kong's Singtao Daily newspaper, which reported the fee increase today.

"We have noted that the clearing bank of the renminbi business scheme has issued a notice to participating banks with the widening spread," a Hong Kong Monetary Authority spokesman said.

Double Play

Hong Kong investors can convert money up to the equivalent of 20,000 yuan ($2,814) a day and invest in China one-year deposits, the report said. HSBC Holdings Plc offers interest rates of about 0.75 percent for Hong Kong dollar deposits and 0.70 percent for yuan deposits. Opening a bank account in the Chinese mainland gives Hong Kong investors access to mainland's one-year deposit rate of 4.14 percent.

The amount of yuan deposits in the city was 47.8 billion yuan at the end of February, compared with 24.9 billion yuan a year earlier, according to the HKMA Web site. That doesn't include yuan deposits held by the city's residents on the mainland.

A third of the $80 billion increase in the renminbi reserves in January may have been from Hong Kong, Shenyin Wanguo Research & Consulting Co, the research unit of the nation's third-largest brokerage, said in a February report.

China needs to slow surging inflows of cash betting on yuan appreciation, including deposits from Hong Kong, Li Yang, a former central bank adviser, told a conference in Beijing last week.

Investing in yuan is a "double play" for Hong Kong citizens because they get higher interest rates and the potential for currency appreciation, said Li, who is the director of financial research institute of the government- backed Chinese Academy of Social Sciences.