CNH Tracker-Offshore yuan products under scrutiny after sharp yuan fall

By Michelle Chen and Saikat Chatterjee

HONG KONG, March 20 (Reuters) - The dramatic fall of the

Chinese currency after last week's widening of its trading band

has put the thriving offshore yuan-structured product business

under pressure, prompting regulators in South Korea and Taiwan

to scrutinize it.

The probes shine show how much the one-way bet on the yuan

strengthening has grown in recent years, either through rapid

expansion of offshore yuan deposits or via complicated

structured products.

South Korea's authorities are inspecting units of three

China banks -- Bank of China Ltd., Industrial and

Commercial Bank of China Ltd. and China Construction

Bank Corp -- over a spike in yuan holdings,

according to regulatory sources.

Yuan deposits by local residents in South Korea stood at the

equivalent of $7.62 billion at end-February, more than eight

times that at end-September, data from its central bank showed.

On Thursday, Taiwan media reported the island's financial

regulators are checking seven banks to see if they properly

advised clients about potential risks of currency investments

after receiving complaints about losses related to the yuan's

fall.

According to bankers, some of the diversified yuan products

are leveraged bets that were designed to hedge foreign-exchange

risks for exporters, but have been sold to individual investors

who have no corporate needs.

"Most of the yuan products sold in the past few years are

betting on yuan appreciation. The sudden weakness of the

currency has put these yuan-structured products such as target

redemption forwards under huge pressure," said a treasurer at a

Chinese bank in Hong Kong. (For related story,

see )

"Taiwan is quite aggressive in selling such products, while

the genuine demand is not that much," he said.

A rise in cross-border yuan trade settlement has been

another factor driving a swelling of the offshore yuan pool.

The strength of the "redback" during the past four years has

spurred growth in yuan deposits from Hong Kong to Singapore, as

companies hungry for yuan assets gladly accepted payments from

their mainland trade counterparts.

But after a more than 30 percent rise against the U.S.

dollar since 2005, the yuan has fallen nearly 3 percent this

year, raising concerns that attractiveness of yuan assets may

falter.

There are some early signs that China's capital inflows are

slowing. Foreign direct investment (FDI) rose only 4.1 percent

in February from a year earlier, compared with a 16.1 percent

increase in January.

The yuan's weakening also casts a shadow over the

mushrooming yuan deposits in Hong Kong and trade settlement

denominated in the Chinese currency. Cross-border yuan trade

settlement hit a record in January, according to the Hong Kong

Monetary Authority.

The growth of the yuan trade settlement programme in Hong

Kong is "supported by robust infrastructure and risk management

of the banks", the Hong Kong Monetary Authority said on

Thursday.

From nearly zero in 2009, the proportion of China's trade

conducted in yuan swelled to more than 16 percent last year.

While that rise in trade has been accompanied by a jump in

offshore yuan deposits, market watchers are hoping the yuan's

recent volatility would prompt genuine trade participants to use

the programme, rather than speculators masking arbitrage flows.

"The roots of the yuan trade settlement programme were laid

in arbitrage and the recent currency volatility is likely to

lead to more sustainable growth," Hu Beihai, an assistant

general manager at Bank of China said last week at an event

hosted by ASIFMA, an industry body.

WEEK IN REVIEW:

* JP Morgan Asset Management said on Monday it had added a

share class hedged to renminbi to its Asia Equity Dividend Fund,

to meet growing demand for renminbi-denominated investment

products.

* IFC, a member of the World Bank Group, said on Wednesday

it raised another 1 billion yuan to double the amount of its

first London-listed yuan bond. The order book topped 3 billion

yuan, with more than 90 percent of the investors coming from

outside Asia.

* Taiwan's yuan deposits amounted to 247 billion yuan

($39.86 billion) by the end of February, up 15.2 percent from

the previous month, according to Taiwan's central bank.

* China has allowed currency traders to directly trade the

yuan for the New Zealand dollar, the central

bank said on Tuesday, a move that lowers transaction costs for

selling and buying of the two currencies.

* The Monetary Authority of Singapore (MAS (Shenzhen: 300275.SZ - news) ) said deposits

hit 200 billion yuan at the end of December. Helping lift the

business in 2013 was the appointment of Industrial and

Commercial Bank of China as China's

official clearing bank for the currency in Singapore.

CHART OF THE WEEK:

China has signed a series of bilateral currency agreements in

the past four years to promote the use of the yuan in trade and

investment: http://link.reuters.com/fuf67v

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THOMSON REUTERS SPEED GUIDES

($1 = 6.1965 Chinese Yuan)

(Editing by Richard Borsuk)