The HKMA, Hong Kong’s de facto central bank, gave a helping hand to the offshore renminbi market last week, creating a liquidity ratio to replace its old risk management ratio — in effect increasing the list of acceptable assets that banks can hold in reserve — and introducing a one week repo facility.
Bank analysts think that will help grow the offshore renminbi loan market, which is still embryonic. Loans bankers argue that the bilateral offshore renminbi loan market is already sizeable — some estimate that it is at least as big as the bond market, which is worth $7bn so far this year — but the syndicated loan market is still struggling. The latest measures are unlikely to make much of a difference to that.
The HKMA is replacing a risk management limit, which compares assets to deposits, with a liquidity ratio, which compares a broader set of assets to a broader set of liabilities. But this only has an impact when a bank already has some renminbi liquidity. Most do not.
The HKMA will not give figures on how renminbi deposits are split between different banks, but loans bankers and analysts assume that only a handful of banks hold the vast majority of deposits.
These banks are not particularly active in the interbank market, and it is hard to blame them. Most interbank lending, perversely, goes from foreign banks — or the rather, the few that have big deposits, like HSBC — to mainland lenders, said a Hong Kong-based analyst. This is because the mainland banks have exhaustive relationships with Chinese companies that need liquidity offshore.
There is enough spare capacity for foreign banks to grow interbank lending to their overseas rivals too. The offshore renminbi loan-to-deposit ratio was only around 8% at the end of March, said an analyst, nowhere near the 82.5% Hong Kong dollar loan-to-deposit level in the same month.
But by and large, the big depositors keep renminbi liquidity to themselves, and profit from bilateral loans instead of moving onto club or syndicated deals. Until they are incentivised to lend to other banks in big size, the HKMA’s liquidity measures will ease conditions for the big lenders without giving much help to the competition.
Lender of first resort?
There is one way for renminbi-hungry banks to fund, of course: they can tap the repo facility. The HKMA has told banks that it welcomes them rolling over these one week loans. But the terms of the facility could change at any point — as the HKMA has warned — and the huge maturity mismatch between the liquidity facility and any realistic loans to corporations would put off all but the most forgetful bankers.
The past has taught us well: you can make a lot of money exploiting a maturity mismatch, but unless you have a back-up for your liquidity, you can blow up too. The HKMA facility should be considered as this back-up, which rules it out from being a useful source of liquidity for a syndicated loan market that is not under severe stress. The last resort should not be the first choice.
The offshore renminbi loan market has already grown from its anaemic volumes last year, and loans syndicate officials are working to chip away the factors keeping a big rise in volumes at bay. But until depositors shift their cash around to other banks, or big deposit-takers feel the need to lend to their rivals, the syndicated market is still going to struggle to take off.