"Some investors are yet to be adaptive to the new situation and their pessimistic sentiment will continue for a while."
More than a trillion yuan ($160 billion) in bank deposits and money market instruments circulate within Hong Kong's banking system. Most is trade related, but some is positioned to take advantage of the higher onshore yields and a currency that has gained more than 30 percent since a landmark revaluation in 2005.
Deposits globally outside mainland China total more than a trillion yuan, up from just a few million yuan five years ago before the start of China's internationalization drive.
Investors said yuan internationalization could slow as losses incurred on yuan-related products mounted and investor appetite for them waned.
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"In the near term, the fall of the yuan is likely to curb investors' interest in yuan products," said the treasurer at a Chinese bank in Hong Kong.
Most of the products were sold betting on yuan appreciation, a reasonable bet since the currency has risen steadily since the 2005 revaluation. The sudden drop in the yuan has put these products under pressure.
"These are leveraged products which were originally designed to hedge FX risks for exporters, yet they have been sold to investors without hedge demand as investment products."
Regulators start to fret
Another reason for pause is that regulators in South Korea and Taiwan have flagged potential risks associated with a more volatile yuan by looking into the rapid rise of yuan deposits in their banking systems.
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Yuan deposits in South Korea, via structured products, have soared eight-fold since September to $7.56 billion at the end of January, prompting the Korean central bank and financial regulator to inspect the units of four foreign banks.
Taiwan's financial regulators are likewise checking seven banks to see if they properly advised clients about the potential risks of currency investments after receiving complaints about losses incurred on structured products due to the yuan's fall.
Given that exposure to the yuan is small relative to the Korean and Taiwanese banking systems, regulators are more likely to be concerned about investor losses, especially retail investor losses, rather than any systemic risk these exposures may pose.
Regulators in the two biggest offshore yuan centres - Hong Kong and Singapore - have not expressed concern about the rise of yuan deposits in their banking systems. Both said they had not received any complaints from investors about losses on yuan-related products.
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To be sure, analysts say longer-term pressure on the yuan is upwards, so the currency's decline so far this year is likely to be temporary. Every country in Asia counts China among its top three trading partners, helping to explain Beijing's strides in persuading them to conduct trade in the yuan.
The dollar's share in settling trade within Asia fell to below 80 percent as of September 2013 from more than 90 percent in January 2012, SWIFT, an industry body that tracks trade flows, says.
Kevin Tay, the Singapore-based regional chief investment officer of wealth management at UBS, argues the outlook for the yuan is clear given China's current account and trade surpluses, currency reserves of $3.8 trillion and low foreign debt.
"If you focus on that, there is absolutely nothing you should be worried about with regards to where the yuan is going to be moving to," Tay said.