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CNH Tracker-Hong Kong banks cut yuan deposit rates as stock connect disappoints

By Michelle Chen HONG KONG, Nov 27 (Reuters) - Some Hong Kong banks have started to cut yuan deposit rates in the wake of the launch of a long-awaited "stock connect" scheme that attracted only muted interest and less-than-expected demand for the Chinese currency. The cut in deposit rates followed mainland China's first official interest rate cut in more than two years in as authorities attempted to energise an economy that is on track for its slackest annual growth in 24 years. Banks in Hong Kong vied with each other to offer high interest rates this year to draw in new yuan funds as investment channels were significantly broadened while the sharp fall in the "redback" sapped investor appetite for yuan assets. The competition intensified as banks bet on robust demand for the currency for use in the Shanghai-Hong Kong stock connect scheme, a landmark link that gives foreign and Chinese retail investors unprecedented access to the two exchanges. One-year yuan deposit rates rose to as high as 3.4 percent before some banks began to lower them this week. China Construction Bank (Asia) set its new rate for one-year deposit 15 bps lower at 3.25 percent and Shanghai Commercial Bank offered 2.95 percent. Despite the cut, deposit rates in the offshore yuan market are still more attractive than the benchmark rate in the onshore market, which was trimmed by 25 basis points (bps) to 2.75 percent on Friday. "Some banks actively stored yuan funds in the past few months, but now they found demand for the currency was not as strong as expected," said Banny Lam, co-head of research at Agricultural Bank of China International in Hong Kong. "Yuan deposit rates offered by Hong Kong banks are likely to fall further in the coming months, following the rate cut in mainland China," Lam said. Profit-taking and concerns over the rules blighted trading via the Shanghai-Hong Kong stock connect, which saw the use of daily "northbound" quota shrinking last week. Adding to the headwinds for foreign investors obtaining yuan to enter the Chinese market is that the H-share premium over its A-share counterparts has completely disappeared on an aggregate level and now shows a discount instead. So far, only 12 percent of the 300 billion yuan ($49 billion) northbound quota and 1.4 percent of the 250 billion yuan southbound quota has been used, according to Reuters data, much less than the market had expected. Tepid demand for the yuan also saw USD/CNH cross currency swap (CCS), a rate that reflects cost of borrowing the yuan currency in the offshore market, moving away from more than one-year highs. The three-month CCS rate, for example, fell to 3.3 percent on Thursday from a nearly 17-month high of 3.7 percent hit on Nov 10. WEEK IN REVIEW: * China's Industrial and Commercial Bank (ICBC) signed a pact with the Los Angeles city government to promote cross-border yuan trade and set up an offshore renminbi centre in California, the bank said on Saturday. * China Merchants Bank Hong Kong branch completed its sale of a 2 billion yuan dim sum bond, which was priced at 3.95 percent for the 3-year tranche and 4.05 percent for the 5-year tranche. * The Hong Kong Futures Exchange, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing, will launch three metal mini-futures denominated in the yuan on Dec 1. The contract size for aluminium, zinc and copper futures will be 5 tonnes. * BNP Paribas (China) announced on Wednesday that it had further expanded its presence in the Shanghai Free Trade Zone with the opening of a new branch. CHART OF THE WEEK: Dim sum bond issuance in terms of proceeds and number of issues: http://graphics.thomsonreuters.com/dimsum/index.html RECENT STORIES: CNH Tracker-Stock connect scheme reduces dim sum issuers'costs Gap in China-Hong Kong trade numbers narrows, but still high EXCLUSIVE-EU regulatory concerns curb China stock link volumes More stories about the CNH market Daily onshore yuan reports Daily China money market reports Offshore yuan rate Onshore yuan rate Offshore yuan dealt Onshore yuan on CFETS THOMSON REUTERS SPEED GUIDES (1 US dollar = 6.1368 Chinese yuan) (Editing by Eric Meijer)