RMB liquidity seen under stress in HK amid Stock Connect

January 26, 2015 09:07
Stock Connect is affecting renminbi liquidity in Hong Kong, raising the prospect of a rise in interest rates for the Chinese currency offshore, says StanChart's Woody Chan. Photo: HKEJ

The Shanghai-Hong Kong Stock Connect has caused a dent of about seven percent in Hong Kong's renminbi deposits, sparking concerns about the local liquidity situation for the Chinese currency, according to Standard Chartered Bank (Hong Kong) Ltd.

The proportion of the renminbi funds drawn away to the mainland is likely to trend up to 10 percent, potentially driving up interest rates for offshore renminbi, the Hong Kong Economic Journal cited Woody Chan, StanChart's head of financial markets in Hong Kong, as saying.

Chan urged mainland authorities to set up a mechanism that allows Hong Kong lenders to use their bond assets as collateral to obtain renminbi through an intra-day repurchase window and temporarily divert funds to Hong Kong.

About 50 to 60 banks currently hold quotas to invest in the Chinese bond market.

The Hong Kong Monetary Authority, the city's de facto central bank, launched a market making regime last November by turning certain banks into primary liquidity providers for offshore renminbi with intra-day repurchase arrangements.

Hong Kong's total renminbi savings rose 18 percent last year, while cross-border trade settlement surged 20 percent.

The upcoming launch of a similar stock through-train between Hong Kong and Shenzhen may put further pressure on the liquidity of the redback in Hong Kong, Chan said.

In other comments, Chan said the Chinese currency would be more commonly used in the region when a Guangdong free-trade zone opens.

Lenders have to figure out ways to resolve the problem of the rising funding costs in offshore renminbi, Chan added.

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Freelance journalist