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CNH Tracker-Stock connector, dim sum issues draw on Hong Kong yuan deposits

By Michelle Chen HONG KONG, Dec 4 (Reuters) - A hiatus in Hong Kong's yuan deposit growth has probably become more pronouced since the advent of a landmark stock connect scheme with Shanghai that saw money flow back to China, while a spate dim sum bond issues also has siphoned off yuan funds. Despite the stock connector's lukewarm start, there was a net outflow of 44.7 billion yuan from Hong Kong's yuan pool since Nov. 17, as Shanghai-bound investment totalled 49.3 billion yuan while inflows into Hong Kong were a mere 4.6 billion yuan. The imbalance could become more marked after Europe's main funds regulator streamlined on Tuesday the approval procedure for mutual funds wishing to use the stock connect scheme. Luxembourg's Commission de Surveillance du Secteur Financier (CSSF) will fast-track applications from mutual funds sold to retail investors, also known as UCITS, whose investment policy already permits exposure to China shares. A series of dim sum bond issues, including this year's second batch of offshore yuan bond sales by China's Finance Minister and a sizable bond sale by the country's biggest lender, have exacerbated the tightness in offshore yuan liquidity. Industrial and Commercial Bank of China on Thursday priced its US$5.7 billion offering of notes at 6 percent for the three tranches in U.S. dollar, offshore yuan and euro, according to a term sheet seen by Reuters. The USD/CNH cross currency swap (CCS) rate that reflects offshore yuan liquidity surged to a nearly 18-month high this week, with a three-month contract touching 4.03 percent on Wednesday. The rising CCS rate, in turn, is attracting more foreign issuers to the dim sum market as it helps reduce funding costs when they convert yuan proceeds to dollars. Dim sum bond issuance in Hong Kong is poised for a record year with issues so far reaching 572 billion yuan, 39 percent higher than the 412 billion yuan logged in 2013. Offshore yuan deposit growth has lost much of its momentum this year due to Beijing broadening the channels to repatriate yuan funds, as it accelerates the opening up of China's markets. Hong Kong's yuan deposits fell 0.1 percent to 943.6 billion yuan ($153.61 billion) in October from the previous month, the Hong Kong Monetary Authority said on Friday. The city's yuan deposits only increased by 9.7 percent for the first ten months, compared to 42.7 percent for the full year in 2013. Meanwhile, Taiwan, another big yuan deposit hub, also saw negligible deposit growth most of this year. WEEK IN REVIEW: * Direct trading between the Chinese and South Korean currencies began on Monday, with traders and government officials in Seoul saying transactions were more active than expected. * China's State Administration of Foreign Exchange (SAFE) had approved a total of 298.4 billion yuan Renminbi Qualified Foreign Institutional Investor (RQFII) quota to 93 entities as of Nov 28, the regulator said on Friday. * The Secretary for Financial Services and the Treasury of Hong Kong, K C Chan, started his week-long visit in Europe on Dec. 1 to boost bilateral relations between Hong Kong and Europe and to promote the former British colony as the world's premium offshore Renminbi hub. * ASIFMA and Thomson Reuters launched a white paper on Tuesday, examining the implications of, and outlook for, the recently launched Shanghai-Hong Kong Stock Connect scheme. CHART OF THE WEEK: Dim sum bond sales set to hit a record high in 2014: http://link.reuters.com/wew53w RECENT STORIES: CNH Tracker- Hong Kong banks cut yuan deposit rates as stock connect disappoints CHINA MONEY - Shanghai-Hong Kong stock connect starts with pricing disconnect 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 = 6.1513 Chinese yuan) (Editing by Simon Cameron-Moore)