New | Banks in Hong Kong grapple with changing times

The devaluation of the yuan that shocked markets last week may have been the last nail in the coffin for Hong Kong's once-lucrative offshore financing business.

Since the People's Bank of China started cutting interest rates and reserve rate ratios in November 2014, and as the yuan slowly depreciated against the US and Hong Kong dollars for most of this year, borrowing offshore has increasingly become more expensive for mainland companies.

The issuance of dim sum bonds (yuan-denominated bonds issued outside China) by mainland issuers, loan growth and demand for trade financing have all been muted in the city in the first half. Mainland-related loans account for about 32 per cent of lending in Hong Kong.

Signs last week that the People's Bank of China was unhinging the yuan's long-standing peg to the dollar, followed by a more than 3 per cent depreciation of the yuan over a three-day period, showed the business formula Hong Kong banks had come to rely on may be coming to an end.

Spikes in yuan funding costs in Hong Kong in February and March had already reduced appetite for offshore capital, culling trade financing and the "neibaowaidai" model, or Chinese companies pledging yuan-denominated assets to get offshore funding, noted Bank of East Asia deputy chief executive Adrian Li Man-kiu after the bank's interim report.

"Issuers don't want to pay high yield, and investors are less confident," said Nathan Chow, an economist at DBS.