HONG KONG - Bank of China (BOC) Hong Kong Ltd has cut its interest rate for yuan deposits in Hong Kong. That's after money held in accounts rose to a record in February, reflecting increased demand for trade and investment in the currency.

The lender, the city's sole clearing bank for yuan banking services, cut the annual rate to 0.629 percent from 0.865 percent, spokeswoman Angel Yip said on Thursday. Deposits climbed 10 percent in February from the previous month, or more than fivefold from a year earlier, to a record 407.7 billion yuan ($62.3 billion), the Hong Kong Monetary Authority reported.

"People have been converting Hong Kong dollars into yuan because of expectations that China's currency will appreciate, and we're slowly having growth of yuan investment products," said Gavin Parry, managing director of Parry International Trading Ltd in Hong Kong. "If the deposits continue to increase at a faster pace than existing investment opportunities, rates may fall further as banks can't find many uses for deposits."

China is seeking to promote the use of the yuan to make it more internationalized. The People's Bank of China said last week that it will broaden cross-border use of the currency and facilitate the repatriation of overseas yuan funds.

"The move is to boost yuan liquidity in Hong Kong so that enough capital is available to be invested in yuan-denominated financial products in the near future," Lu Ting, an economist at Bank of America Merrill Lynch wrote on Friday.

The yuan has risen 4.2 percent in the past year and touched 6.5478 per dollar on Thursday, the strongest level since 1993. Non-deliverable forward contracts show expectations that it will climb 2 percent in the coming year.

The central bank earlier this month expanded the trial use of yuan for international trade settlement to the entire country from 20 provinces. The settlement amount reached 506.3 billion yuan last year, according to the central bank's data. The program started in July 2009. China also approved 29.2 billion yuan of quotas for five foreign institutions to invest in its interbank bond market as of December.

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The lower rates were unlikely to change the trend of rising deposits given the expectations of yuan appreciation and the dominance of the city's exports to the Chinese mainland in local-currency settlement, according to a report from Citigroup Inc's Hong Kong-based economists on Friday.

Hong Kong's trade settlement denominated in yuan rose "significantly" to a monthly average of 95 billion yuan in the first two months of 2011, Peter Pang, deputy chief executive at the Hong Kong Monetary Authority, said in a transcript published on the regulator's website on March 25. That compared with a monthly average of 57 billion yuan in the second half of 2010, he said.

People will need more better-yielding products to keep the currency as deposits, said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong.

Li Ka-shing, Hong Kong's richest man, is planning to sell shares in a Chinese real-estate investment trust in Hong Kong's first yuan-denominated initial public offering, according to a sales document obtained by Bloomberg last week.

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