In order to prevent market distortions during periods of tightened liquidity, the HKMA has announced two new enhancements to the existing renminbi facility.
The renminbi liquidity facility can now provide one-day funds to participating banks which will be made available the next day or T+1, according to the HKMA in a press release on July 25. This complements its provision of one-week funds that is provided within the same timeframe.
“This enhancement is a positive move,” said Li-Gang Liu, chief economist for Greater China at ANZ. “To promote confidence in using renminbi in the offshore market, there is a need to ensure sufficient liquidity in the offshore interbank market in order to prevent any disorderly market movement. This is because deposits are held unevenly among offshore banks.”
Also, overnight funds – available on the same day or T+0 – will be provided to help banks meet their liquidity needs.
The HKMA will use its own source of renminbi funds in the offshore market to provide such lending and expects the amount of overnight funds to be provided will be up to Rmb10 billion on a single day.
“By establishing overnight and one-day facilities, these banks will be provided with an alternative access to renminbi funding, helping them to cope with periods of tighter market liquidity,” said Liu. “As the PBoC cannot act as a lender of last resort outside China, the HKMA can play a similar role by better deployment of its currency swap facility with the PBoC.”
The HKMA will continue to make use of its Rmb400 billion (US$61.2 billion) swap agreement with the People’s Bank of China (PBoC) in providing such funds.
As a result, the volatility in the CNH money market should be substantially reduced with the improvements made to the renminbi liquidity facility compared to the past when banks could not get immediate relief to any short-term liquidity squeeze without a time lag.
For example, the offshore overnight rate jumped from 1.3% on September 9, 2012 to 5.5% on September 17, 2012.
Conversely in the onshore market, the overnight repo rate only touched a peak of 4.5% over the same period as the funding stress was effectively capped by the PBoC's continued provision of liquidity to banks via reverse repos which are settled on a T+0 basis as oppose to HKMA’s T+2.
Although the HKMA shortened the notice period for tapping the facility from two days to one on January 15, it was still not sufficient as the overnight rate touched a record high of 6.5% in late June.
“This provision should limit the potential for extreme squeezes in short term CNH liquidity as we have seen periodically with shorter-dated CNH FX forward points,” said Paul Mackel, head of Asian currency research at HSBC. “The volatility in points will reduce over time as more CNH liquidity measures are rolled out.”
Experts believe that the renminbi liquidity facility being developed in Hong Kong can serve as a model for other offshore centres.
Despite this the HKMA notes that although participating bank are welcome to use the renminbi liquidity facility to meet short-term funding needs, they are advised to plan their funding ahead of time and avoid over-dependence on the funds.