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Wednesday, September 14, 2016, 00:25

Offshore yuan pool on verge of drying up

By Luo Weiteng
Offshore yuan pool on verge of drying up

An employee counts yuan banknotes at Bank of China Hong Kong Ltd. Continued depreciation of the yuan has dragged down offshore renminbi deposits, with the offshore yuan liquidity pool at risk of drying up. (Xaume Olleros / Bloomberg)

Lingering concern over continued depreciation of the yuan has dragged down offshore renminbi deposits, with the offshore yuan liquidity pool on the verge of drying up.

The People’s Bank of China set the yuan reference point against the US dollar at 6.6726 before the market opened on Tuesday — stronger than the previous fix of 6.6908.

The overnight CNH-Hong Kong Interbank Offer Rate (CNH Hibor) — a daily benchmark for offshore renminbi interbank lending — dropped sharply by 268 basis points to a normal level of 2.8380 percent on Tuesday after hitting the highest level since February 19 at 5.5155 on Monday, according to data from the Treasury Markets Association.

The onshore yuan in Shanghai remained flat, trading at 6.6799 per dollar as of 6:00 pm on Tuesday. The offshore yuan in Hong Kong was basically flat at 6.6854 to the dollar as of 6:00 pm.

“Capital outflow pressure has remained on strong expectations of sustained yuan depreciation,” said Kelvin Lau Kin-heng, senior economist at Standard Chartered Bank.

“As the central government tries to encourage foreign investments directly in the onshore market, the yuan liquidity pool in Hong Kong will continue to shrink,” he said.

Renminbi deposits in the SAR — the world’s largest offshore renminbi center — fell 6.2 percent on month to 667.1 billion yuan (US$99.90 billion) in July, hitting the lowest level since March 2013.

As central banks from other countries are gearing up for the yuan’s inclusion in the International Monetary Fund’s special drawing rights (SDR) currency basket from next month, Lau believed it has also drained the offshore yuan liquidity. Such an impact, he said, would be mitigated in October, but capital inflows that the inclusion may create would be rather modest in the near term.

Hong Kong Monetary Authority Chief Executive Norman Chan Tak-lam said earlier this month the shrinking offshore yuan pool is a global phenomenon. But, the upcoming cross-border stocks trading link between Shenzhen and Hong Kong, he pointed out, could pump a big chunk of yuan liquidity back into offshore markets.

The Chinese mainland’s better-than-expected data for August may also shore up the yuan’s exchange rates against the greenback and a basket of currencies. Last month, the country’s economy gathered steam, with industrial output rising 6.3 percent from the previous year and retail sales surging by 10.6 percent on year. Fixed-asset investment rose 8.1 percent in the first eight months of this year.

However, the economic downturn and the mainland’s policy uncertainties have threatened to dampen investor confidence.

A recent survey by Standard Chartered showed that more than 40 percent of offshore corporate respondents noted their use of offshore renminbi products had remained “inactive and unsure”.

Some 18 percent of those polled said they expected to trim their yuan deposits, with 11 percent expecting to increase them.

Lau warned of further headwinds from the mainland’s real-estate market, which is bracing itself for a series of curbs in the second half of the year as policymakers try to cool down the sector’s feverish growth in the first half.

“Market fluctuations will continue to weigh on swaths of the domestic economy and the yuan’s stability. That’s why it’s still too early to say the Chinese currency has bottomed out although the yuan has shown signs of stabilizing in recent months,” he said.

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