A LONG stretch of yuan appreciation helped Hong Kong build a sizable pool of the currency and banks got a windfall selling yuan-related products.

    Now, two days of tumbles have triggered worries that China may allow a major depreciation, which could discourage global investors from using the currency and make the pool shrink.

    The offshore yuan has fared worse than the onshore one after the People’s Bank of China’s surprise Tuesday move to devalue the currency by nearly 2 percent. Offshore yuan have shed more than 5 percent, compared with 3.5 percent onshore.

    The big offshore slide will dampen investors’ interest to hold yuan deposits, given it has already eaten up all returns they can get from a standard yuan deposit contract, which usually offers 3-3.5 percent for a one-year tenor.

    In addition, those who invested in structured yuan deposits that bet on yuan appreciation — as seen in past years — are unlikely to get the extra returns these products offered.

    Banks in Hong Kong have launched a slew of structured yuan deposit products with attractive returns to compete for new funds after the Central Government scrapped a 20,000 yuan (US$3,110) daily conversion limit for local residents in last November.

    These products usually offer a guaranteed interest of just 0.3-0.5 percent, but the return can be as high as more than 8 percent if the yuan appreciates to a certain level within the contract periods.

    “Yuan structured products have been very popular in Hong Kong thanks to investors’ confidence in the yuan, but demand for these products will decline following the sharp depreciation this week,” said Frances Cheung, head of Asian ex-Japan rates strategy at Societe Generale.

    The yuan’s fall comes just as the Hong Kong offshore pool was starting to grow again following a decline at the beginning of this year as some money went northbound through the stock “connector” with Shanghai.

    Yuan deposits in Hong Kong, the world’s biggest offshore yuan hub, climbed to 993 billion yuan in June, still below the December peak of 1,004 billion yuan. (SD-Agencies)