CNH Tracker-Cash squeeze may stifle initial stock connect demand
By Saikat Chatterjee HONG KONG, Sept 4 (Reuters) - An increase in offshore yuan deposit rates may become more pronounced in the days ahead as a landmark stock market connect plan between the mainland and the former British colony enters the final stages of completion. That extra cost could, at least temporarily, stifle demand for mainland China stocks from offshore retail investors, which the connect scheme is ultimately meant to encourage. The tightening in offshore liquidity is evident in the behaviour of offshore yuan deposit rates. For example, three-month interbank rate for offshore deposits hit a 2014 high of more than 3 percent in late August compared to 1.5 percent in June before receding slightly. That compares with similar deposits onshore at around 4.4 percent. Authorities expect the landmark stock-connect programme between Shanghai and Hong Kong - another step in China's efforts to open up its markets - will launch in October. Regulators and market participants are racing to test mechanisms to ensure readiness. The anticipated initial wave of demand for mainland stocks once the scheme opens could put further upward pressure on offshore deposit rates as investors wanting to buy onshore stocks can only do so using offshore yuan. More prolonged pressure on offshore yuan liquidity could prompt some regulatory response. "We will have to see a sustained demand for mainland shares for at least a month to trigger some kind of policy response to boost CNH liquidity," said the head of currency trading at a U.S. bank in Hong Kong. Among the likely policy responses expected by banks is a potential upgrade to Hong Kong's yuan liquidity support facility to coordinate with the new settlement mechanisms. Another potential fix could be use of an emergency currency swap line previously set up with China's central bank to smoothen any temporary liquidity mismatches. Meantime, divergence in the trends between the offshore and the onshore markets will present arbitrage opportunities for banks and corporates. An extended squeeze in the offshore market would push the yuan in Hong Kong to start trading at a premium to the mainland as opposed to near identical rates for most of this year. It would also force banks to offer higher interest rates encouraging retail investors to convert their Hong Kong dollar holdings into Chinese currency deposits, which would eventually help correct some of the liquidity squeeze. WEEK IN REVIEW: New fixings. Thomson Reuters Corp , the news and information company has been appointed by the Taipei Foreign Exchange Market Development Foundation as the official calculating agent for its offshore renminbi benchmark otherwise known as the CNT TAIBOR. This industry rate will provide a formal benchmark for market participants to reference when pricing renminbi loans, interest rate contracts and derivatives products. Fresh quotas. Blackrock, the world's biggest money manager said this week its Hong Kong subsidiary has been awarded a $500 million QFII investment quota by the State Administration of Foreign Exchange. The allocation relates to the QFII licence received by Blackrock in October 2012. More RMB, please. Hong Kong and Taiwan investors have strong interest in yuan assets, but they appear to have distinct preferences and attitudes towards the asset class, according to a latest Manulife survey. Nearly four out of every five investors in Hong Kong own yuan investment products compared to one in two in Taiwan, the survey said. CHART OF THE WEEK: Yuan deposits in Hong Kong: link.reuters.com/nez26t Yuan deposits with Hong Kong banks have peaked out after nearly hitting a high water mark of one trillion yuan earlier this year. A rapid growth of renminbi-denominated yuan investment quotas and an unusual episode of currency weakness earlier this year have been blamed as factors behind the fall. RECENT STORIES: CNH Tracker-European centres vie for trade in Chinese currency Hong Kong Exchange asks China for time to implement tax rules on cross-border deals 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 = 6.1408 Chinese yuan)
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