LEO Lo, co-founder of a Hong Kong apparel maker whose customers have included Baby Dior, said he was surprised when five senior bankers visited his office this year in an industrial district of Kowloon in Hong Kong offering to buy lunch.

Last year, companies such as his had to chase after the banks, only got access to lower-level executives, and meals usually went on clients' tabs, Lo said. Now, lenders are pursuing him to offer loans, trade settlement, hedging and investment opportunities in the yuan as they vie for a bigger piece of Hong Kong's expanding market for the Chinese currency.

"Banks are under pressure to compete," said the chief executive officer of Wenlo's Apparel Manufacturer Ltd, who rejected entreaties from Citigroup Inc, Hang Seng Bank and Standard Chartered Plc in favor of his three usual banks, which he declined to name. "They're getting ready for the race. They know that yuan is their future."

As the world's second-largest economy uses Hong Kong as a testing ground for currency convertibility by allowing banks to offer limited services in yuan, lenders are stepping up competition for that business. Apart from courting companies, they're raising interest rates to draw depositors, hiring staff, holding investor roadshows, boosting underwriting of bonds, increasing lending and creating investment products.

Their increasingly fierce rivalry, coupled with a low interest-rate environment, has meant slowing profit expansion at banks operating in Hong Kong. That makes finding new revenue streams critical to maintaining growth.

"This is a growing business," said Alex Cheung, managing director of institutional banking for Singapore-based DBS Group Holdings Ltd in Hong Kong, whose yuan business contributed to 24 percent of the local unit's revenue in the three months to March, up from a quarterly average of 17 percent last year.

"If you don't do this, you will definitely lose out."

Dim Sum feast

Sales of so-called Dim Sum bonds, or yuan-denominated notes issued in Hong Kong by companies to fund expenses and expansion on the Chinese mainland, is forecast to more than double to 300 billion yuan (US$47.2 billion) this year. Last year's 152 billion yuan, according to data compiled by Bloomberg News, compares with HK$230 billion (US$29.7 billion) in Hong Kong dollar debt issued by private companies in the same period.

Dim Sum loans may also jump two-fold to 60 billion yuan as firms seek to tap lower borrowing costs in Hong Kong to pay for manufacturing expenses on the mainland, where interest rates are higher.

The yuan may become one of the world's top three global trade currencies in the next five years, according to HSBC Holdings Plc. As much as 50 percent of China's trade may be settled in the currency by 2015, up from 10 percent in the first quarter of this year, the lender said.

Banks operating in Hong Kong are vying for a larger piece of that business. They managed 571.2 billion yuan in offshore yuan trade in the first quarter, up from less than 50 billion yuan two years ago, according to the Hong Kong Monetary Authority.

"When the market first emerged, banks were testing the water only, but they are more aggressive now," said Ivan Li, deputy head of research at Kim Eng Securities Hong Kong Ltd, citing the "huge potential" of the market.

"Their business size has become much bigger, and they are keen to expand that further."

Banks' net interest margin, a measure of lending profitability, has shrunk for the last five years, the HKMA said in its annual reports. The margin narrowed to an average of 1.25 percent last year from 1.87 percent in 2007.

Crowded field

In the same period, 16 foreign lenders won approval to operate in Hong Kong, according to the city's de facto central bank. The number of banks competing to underwrite yuan bonds in Hong Kong almost tripled to 38 in 2011, from 14 the previous year, according to data compiled by Bloomberg News.

First-half profit growth of the local unit of DBS slowed to 20 percent from 40 percent a year earlier, while Hong Kong-based Hang Seng Bank's profit expansion slowed to 14 percent from 17 percent a year earlier.

Banks have been holding investor roadshows and education seminars to promote yuan use for trading or raising capital through Dim Sum bonds. Standard Chartered, which earned 23 percent of its pretax profit last year from Hong Kong and doesn't break out earnings from yuan operations, in June completed a five-month roadshow in China, Japan and South Korea for about 800 companies and investors. It was the bank's biggest, said Joyce Li, a Hong Kong-based spokeswoman.

The goal is to keep clients current on trends, regulatory changes and new products and services, according to John Tan, head of global markets at Standard Chartered's Hong Kong unit.

"We are not extremely concerned about competition, but we are keen to maintain our competitive edge in the long run," Tan said. "It's like car racing. One needs to be aware of the road condition and positions of other racers, but getting his own wheels in control is more important."

Banks have been adding staff and creating teams for yuan operations. A "large number" have hired or relocated employees to Hong Kong in the past three years, as well as to London, which has also emerged as an offshore yuan center and is setting up banking services in the currency, said Louisa Wong, founder and executive chairman of executive-search firm Bo Le Associates. She didn't provide specifics.

HSBC this year appointed Paul Gooding to head its European yuan business from its London headquarters after hiring Candy Ho as its Hong Kong-based head of Asia's yuan business development last year.

"We've seen a massive growth in the yuan offshore business and the hiring of professionals," said Pallavi Anand, director of recruiting firm Robert Half International Inc in Hong Kong. "The hiring outlook is looking fantastic because the yuan business is hiring, and the activity here in Hong Kong is really looking very positive."

Demand for bankers

HSBC, Standard Chartered and Australia & New Zealand Banking Group Ltd have been strengthening yuan operations in Shanghai and London, Anand said. The banks declined to disclose related hiring figures. The "maximum demand" for bankers is from Chinese mainland lenders, which are moving staff from Shanghai and Beijing to Hong Kong, she said.

"We expect to see a rising trend of Chinese banks hiring more aggressively as compared to their foreign and international counterparts," she said.

Deposits are another battle arena in the yuan market, as the funds underpin lending in the currency. Savings in yuan made up 9 percent of the city's total as of June, according to HKMA data.

Savings in yuan surged in Hong Kong after China began allowing companies in July 2009 to settle transactions in its currency instead of US dollars, and climbed more than 27-fold in five years to a record 627.3 billion yuan in November, HKMA data showed.

Those funds have since shrunk to about 558 billion yuan at the end of June as expectations of the yuan's appreciation receded and discouraged individuals from tapping the 20,000-yuan-a-day purchase limit allowed in the city.

Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia, cut his yuan-gain projection in July to 6.30 per dollar by the end of this year from 6.07. Ji's estimates were the most accurate over the last six quarters, according to Bloomberg Rankings. Its current value of 6.35 to the US dollar is down almost 1 percent this year, the most since the yuan was allowed to fluctuate within a narrow range in July 2005. It appreciated 4.7 percent last year.

To attract yuan savings, HSBC raised the cap of its preferential interest rate on three-month yuan deposits four times in the first half of the year to 3 percent from 1.1 percent, according to Yvonne Chuang, a Hong Kong-based spokeswoman. Standard Chartered increased the three-month rate three times to 2.5 percent, Li said.