Starting today the Hong Kong Monetary Authority (HKMA) will provide a repo facility for renminbi (RMB) liquidity – in exchange for collateral such as government bonds – to banks conducting RMB business in Hong Kong that are experiencing a liquidity squeeze.
The RMB repo facility will make use of the currency swap arrangement between the People's Bank of China and the HKMA, in place since January 2009. Eligible collateral to access RMB liquidity includes HKSAR government bonds, RMB-denominated bonds issued in Hong Kong by China's Ministry of Finance – also known as dim sum bonds – and Exchange Fund Bills and Notes.
Charles Feng, head of fixed income, currencies and commodities trading for North East Asia at Standard Chartered in Hong Kong, says rapid RMB loan growth is behind the repo facility.
"Hong Kong has a fast-growing RMB market and loan growth has been very fast, driving liquidity tightness in the interbank market," he says. Hong Kong banks recorded year-on-year RMB loan growth of 29% in financial year 2010 and more than 20% in 2011, according to data from Bank of China.
Peter Pang, deputy chief executive of the HKMA, says the facility will support the continuous deepening of the RMB capital market in Hong Kong and reinforce Hong Kong's role as the global hub for offshore RMB business.
"It would serve to address short-term liquidity tightness that may arise from time to time, for example due to capital market activities or a sudden need for RMB liquidity by participating banks' overseas bank customers. This would help enhance market confidence and support the long-term development of the offshore market," says Pang.
Feng says the move is timely with two weeks to go until Hong Kong celebrates the fifteenth anniversary of its handover to China on July 1 when the Chinese premier Wen Jiabao is expected to visit the special administrative region.
"The authorities want to make sure RMB development is moving forward and that liquidity is supported for all operations," Feng says.
Banks may use the RMB liquidity facility to manage their short-term liquidity needs and may roll over the borrowings under the facility if needed but they are not expected to use the facility as a primary means to access RMB liquidity.
Feng says the arrangement offers good downside protection for banks but that there may not be a big initial take-up of the facility "until there is an emergency" that warrants it. He adds that the pricing may not be cheap.
"It is supposed to be the market rate but could be something that references the onshore Shibor [Shanghai interbank offered rate]," he says. The Shibor seven-day rate currently stands at 2.72% while the three-month rate is 4.74%.
Seventeen central banks now have a currency swap facility with the People's Bank of China but Feng does not believe the time is right for these central banks to follow suit and offer their local banks a similar liquidity arrangement. "In other regions we haven't seen the same RMB loan demand [as in Hong Kong] so there isn't a natural demand for RMB liquidity yet."
The week in Risk.net, May 19-25 2017Receive this by email