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CNH development to dry out HKD liquidity

20 Jan 2012

The development of offshore renminbi will result in tighter Hong Kong dollar liquidity, leading to a slowdown in loans offered and deposits sought in the latter currency, believe analysts.

The attractiveness of CNH is escalating at the expense of the Hong Kong dollar (HKD). But the latter currency is experiencing difficulty in capturing local deposits and loans, especially as its liquidity diminishes.

Investors have been flocking to put their money into CNH-denominated deposits as interest rates offered are far more appealing than HKD-denominated deposits.

“CNH deposit rates are more attractive to depositors versus HKD deposit rates at the moment,” said Sharnie Wong, a Hong Kong-based banks analyst for Asia ex-Japan at Barclays Capital to Asiamoney PLUS in a telephone interview yesterday (January 19). “Ultimately, deposit competition between the two currencies may drive up HKD deposit rates as well.”

“HKD deposit accumulation has slowed, at the expense of CNH deposits,” said Frances Cheung, a Hong Kong-based senior strategist Asia ex-Japan at Credit Agricole in an email reply to questions yesterday. “I expect continued exchanges into CNH on wider investment choices which could mean slow HKD deposit growth in the coming months still.”

Bank of China’s three-month CNH interbank offered rate yesterday was 3.1%, compared with 2.6% for HSBC and 2.95% for Standard Chartered, Treasury Markets Association-compiled data show. The market’s average three-month HKD interbank offered rate is 0.4%, according to a rates strategist at HSBC.

In order for local banks to maintain their margins between lending and borrowing rates, lending rates will have to rise accordingly as well. As a result, borrowing costs for corporates are expected to rise.

This will in turn worsen the liquidity of HKD as it will be considered far cheaper to borrow versus the offshore renminbi.

“Hong Kong dollars will continue to remain tight as customers will still choose to borrow in Hong Kong and US dollars relative to CNH due to the relatively cheaper lending rates,” added Wong.

But as Asiamoney PLUS has previously reported, local banks remain reluctant to lend amid global market uncertainty and as the growth of local currency deposit slows.

“Given likely tapering off loan-to-deposit ratio and a very slow deposit growth, there is limited capacity for banks to extend new loans in the coming months,” said Cheung.

According to the Hong Kong Monetary Authority (HKMA), Hong Kong banks expanded their loan portfolios at a slower pace last year after the fastest growth in two decades in 2010. Total loans in the city increased 20.2% year-on-year, which is a decline from 2010’s 28.6%, said the de-facto central bank on January 18. On a month-on-month basis, loans contracted by -0.7%.

20 Jan 2012