Liquidity in the offshore renminbi (CNH) market has always been at low levels; a natural result of the currency’s immaturity and the restrictions on capital flows.
This was not a problem in the early days of the currency’s development when there were limited outlets for the renminbi and confidence in its appreciation meant that investors were happy to hoard CNH in deposit accounts and watch the returns roll in.
But the CNH market has quickly moved into a new phase, one that is reducing what limited liquidity there is and could slow further developments, particularly in Hong Kong.
The lack of uncertainty around currency appreciation is certainly playing its part. From being a one-way bet there is less confidence in renminbi appreciation, at least in the short term. In addition, the decision by the PBoC on April 14 to widen the band in which the currency trades allows for greater two-way movement.
As a result, investors are looking for alternative options to put their renminbi to work. The launch of the renminbi qualified foreign institutional investor (RQFII) programme created a whole slate of investment products while easing restrictions on trade settlement is encouraging the use of renminbi for transactions with Chinese companies.
And this is having a negative impact on the volume of CNH deposits in Hong Kong. The HKMA reported that CNH deposits slipped 2.1% in March to Rmb554.3 billion (US$88 billion), the fourth straight month of declines. And the banks are getting worried. Local Hong Kong media reported that Bank of Communications (HK), BEA, Citic Bank International, Standard Chartered and Wing Lung banks have all raised their rates to attract greater CNH deposits.
This matters. Banks need to have a strong pool of CNH deposits to support their lending and banking activities.
But there’s only so much the bankers can do, the real responsibility lies with the regulators – namely the PBoC and the HKMA – to change a regime that puts a constraint on liquidity.
The blame predominantly lies with the HKMA. Hong Kong’s banking authority has taken a very conservative approach to the way it regulates CNH holdings. Banks have to hold 25% of their CNH balance sheet in offshore China government bonds, cash or assets held in the China interbank bond market. Net open positions are also restricted to 20% of the CNH balance sheet. It’s true that these regulations were relaxed earlier this year, but offshore renminbi is the only currency subject to these restrictions.
In addition, banks that want to hold some their 25% liquidity requirement in cash are required to deposit that money with the Bank of China (Hong Kong), the official clearing bank. But because banks are limited in how much exposure they can have to a single counterparty as part of prudent risk management strategy, this puts a cap on the amount of renminbi a bank can hold.
One loan syndication chief based in the Hong Kong arm of the UK bank told Asiamoney PLUS they were turning down deposits as they had run up against their limits with the BOC HK. Not a welcome development.
When the renminbi finally finds a home in London or whatever offshore centre the PBoC finally gives its blessing to, it is likely the VNH will be treated the same as any other currency. That is to say without extra regulations to control its accumulation or trading. If the HKMA does not take steps to move these barriers with will soon find that it is home to the smallest pool of offshore renminbi and as a consequence see all the associated business centred out of a rival financial hub.
But some of the blame also lies with the Chinese authorities. Policy changes enacted this year such as the RQFII have given investors place to park their money onshore, but the PBoC could do more to allow renminbi to flow from the mainland to improve the pool of currency offshore. The Wenzhou pilot programme which allows residents to invest overseas should be expanded to the rest of China. Much of that capital would naturally flow to Hong Kong, at least in the first instance.
After all, China is meant to be internationalising its currency not re-domesticating it. If the only avenue for CNH is back into China, internationalisation is over before it began.