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Wednesday, November 19, 2014, 09:03

HK to create yuan interbank market

By Oswald Chan in Hong Kong

Banks and foreign exchange analysts said Hong Kong is poised to develop a yuan interbank market that can better reflect market forces in determining the yuan interest rate and exchange rate following the abolition of the 20,000-yuan ($3,260) daily conversion limit.

The scrapping of the limit has also led to a sharp rise in demand for yuan in the Hong Kong offshore market.

“The new measure will help Hong Kong develop a credible interbank market for yuan trading,” treasury market analyst Wilson Chan told China Daily, adding that the yuan’s currency exchange rate will be determined by market demand and supply in the Hong Kong offshore market (CNH) .

The People’s Bank of China (PBoC) abolished the daily 20,000-yuan conversion cap for Hong Kong residents on Monday. Under the new arrangement, every bank in Hong Kong must have a nominee account held under Bank of China (Hong Kong) (BOCHK) to keep track of yuan transactions. When they buy or sell yuan in the Hong Kong offshore market based on client demand, they will execute the payment instructions to their nominee accounts to transfer the yuan to the “receiver” banks in Hong Kong.

As these “receiving banks” also hold their nominee accounts with BOCHK, all these conversion transactions can be settled. In this manner, BOCHK acts as the clearing bank for yuan settlement in the city.

Before the scrapping of the daily conversion limit, banks in Hong Kong can only execute yuan transactions in the mainland onshore market through the yuan clearing bank. This had resulted in the higher exchange rate (CNY) determined by the PBoC in the onshore market.

Regarding the yuan deposit rate in Hong Kong, Chan said: “The interest rate spread between Hong Kong and the mainland will narrow because of the increased cross-border yuan capital flow resulting from  the Shanghai-Hong Kong Stock Connect. In this process, the overall yuan deposit rate is poised to increase in Hong Kong in the near future.”   

“There is tremendous demand for yuan because investors can now buy as much yuan as they want to invest in yuan-denominated financial products to earn more interest income,” Chan noted.

 The total amount of yuan purchased by Hong Kong people on Tuesday as at 6pm was 360 percent higher than on Friday, said Gary Leung, global markets deputy general manager at BOCHK. “Many more Hong Kong investors are buying yuan-denominated structural financial products,” he said.

Chow Chak-tze, a BOCHK deputy general manager, predicted that the yuan deposit rate in Hong Kong will stay at between 3 and 3.5 percent in the coming six months. Some banks may be even more aggressive in raising their deposit rates to attract depositors.


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