September 4, 2014 / 4:43 AM / 4 years ago

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
    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.
    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
    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:
    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.  
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 

(1 US dollar = 6.1408 Chinese yuan)
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