Financial institutions will now only need to give one day’s notice to Hong Kong Monetary Authority (HKMA) in order to obtain additional CNH during periods of tightened liquidity.
From January 16 banks will be able to secure short-term liquidity through the repo market with a settlement period of T+1 instead of T+2 as long as they post eligible collateral, including Hong Kong government bonds and offshore renminbi bonds issued by China’s Ministry of Finance.
“Banks have accessed this market from time-to-time to overcome their liquidity shortage,” said Norman Chan, chief executive of the HKMA at the Asian Financial Forum (AFF) held in Hong Kong on January 15. “I’m pleased to say that with further discussion with the PBoC [People’s Bank of China], we are able to shorten it to T+1.”
“That means that when you give us a notice today to activate the repo, you will receive the renminbi tomorrow. That is a one-day significant improvement. This will help banks to better manage their liquidity shortages,” he added.
The RMB Liquidity Facility introduced by the HKMA in June 2012 aims to provide liquidity to authorised institutions participating in the CNH business in Hong Kong.
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.
The reason for this is partly due to greater avenues for foreign investment and the remittance of offshore funds back to China, but the fact that PBoC maintains a more superior repo market is also another factor.
For example, the PBoC’s reverse repos – which are available at a seven-, 14- and 28-day tenors – are settled on a T+0 basis, compared to HKMA’s one-week tenor and T+1 basis settlement, suggesting that Hong Kong banks are still not able to obtain real-time liquidity assistance during periods of shortage unlike the onshore market.
While Hong Kong continues to suffer from tightened CNH liquidity conditions, market experts believe that the pool of offshore renminbi will continue to grow, especially with the latest development of Qianhai as China’s new economic hub.
The Shenzhen branch of the PBoC believes the move would enhance the scale of Hong Kong's renminbi assets and improve liquidity in the offshore market.
“Qianhai’s cross-border renminbi loans work both ways - banks in Qianhai could lend to entities in renminbi and of course the other way round,” said Julia Leung, under secretary for financial services and the treasury for the Hong Kong Special Administrative Region of the People’s Republic of China at the AFF. “The depth and breadth of liquidity will grow as there is more onshore and offshore circulation.”
Anita Fung, Hong Kong chief executive officer for HSBC agrees: “The exchange rate of the renminbi is close to the structural equilibrium…and the industry won’t be surprised that there will be more forthcoming opening up to encourage more two-way flows that are not only investment-related but also capital account-related.”
At the end of December 2012, China formally allowed companies in Qianhai to borrow renminbi from Hong Kong lenders as it tries to further open up its capital account and promote the use of the national currency around the world.