The strength of the CNH exchange rate is likely to hold for the first couple of months in 2013 as liquidity of the offshore remains limited.
The Chinese authorities’ recent liberalisation moves favour more inflows into the onshore market rather than outflows. This has negative implications on the liquidity of the offshore market, according to ANZ in a research note released on January 11.
“Offshore renminbi liquidity in Hong Kong will tend to be tighter, at least in the short term,” said Raymond Yeung, senior economist for Greater China at ANZ. “With a limited pool of CNH and uneven distribution of CNH funds among financial institutions, we may still see a slightly stronger offshore exchange rate as in recent months. For small and medium Hong Kong banks, they also need to offshore higher rates.”
Schemes like renminbi qualified foreign institutional investor (RQFII), renminbi foreign direct investment (FDI) and Qianhai schemes all contribute to inflows of the Chinese currency into the onshore market, while programmes like the intra-group outbound lending supports the offshore market.
Although Hong Kong’s renminbi deposits increased 2.9% month-on-month to Rmb571 billion (US$92 billion) in November 2012, this is still below the highs of Rmb620 billion achieved during the same period the year before.
Nonetheless, the opening of intra-group renminbi lending and foreign currency sweeping schemes has made cross-border fund flows possible and easier, notes ANZ.
“For business, the schemes will help improve the efficiency of fund utilisation for multinational corporates and allow easier pooling of the renminbi and foreign currency funds,” said Yeung. “On the back of ‘going out’ policy, Chinese companies will set up more overseas entities.”
According to the People’s Bank of China (PBoC), less than half of the capital account items are basically convertible. Earlier, researchers at PBoC released an article and highlighted a three-stage plan to push forward the liberalisation, suggesting that it may take 10 years for China’s capital account to achieve full convertibility, says ANZ.
However, ANZ believes that the aforementioned schemes reflect the government’s determination to promote capital account convertibility.
In December 2012, the Central Economic Work Conference (CEWC) indicated China will accelerate capital account liberalisation. The People’s Bank of China (PBoC) governor also stated that they target to have basic convertibility – not fully or freely – of the renminbi capital account by 2015.
“If pilot programmes function well, the Chinese authorities will likely expand the trials or launch them formally on a national basis earlier than expected,” said Yeung.