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Tuesday, November 18, 2014, 11:40

StanC sees run on HK offshore renminbi deposits

By Xie Yu/

HONG KONG - A strong northbound trade set off by the Hong Kong- Shanghai stock connect is likely to continue, analysts said, with Standard Chartered suggesting it could drain Hong Kong’s offshore renminbi deposits by about 10 per cent in the coming weeks.

"We expect technical factors to support stronger northbound flows than southbound flows in the coming weeks. The clarification of tax treatment and other regulations makes the Stock Connect attractive to new investments and may also invite substitution flow from existing investors under QFII and RQFII,” Standard Charted said in a report issued Tuesday morning.

While QFII refers to China's Qualified Foreign Institutional Investor scheme, RQFII refers to RMB Qualified Foreign Institutional Investors.

The daily quota of 13 billion yuan earmarked for northbound trade was used up within three hours in Shanghai after the stock link opened on Nov 17, 2014.

On the other hand, 83 percent of the 10.5 billion yuan southbound quota remained unutilised by close of business on Nov 17, suggesting a net drain of 11 billion yuan from Hong Kong’s offshore Renminbi market the same day.

According to the HKEx website, 18 percent of the northbound daily quota had been used up by 10:54 am, as opposed to only 2.9 percent southbound quota.

According to the Standard Chartered report, the trend could lead to tighter offshore renminbi liquidity and higher USD-offshore renminbi cross currency swap rates near-term. Also, it could weigh on the offshore China Government Bond auction slated for 20 Nov, 2014, particularly on short-dated bonds, the report said.

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