The Hong Kong Monetary Authority has introduced two measures to enhance local banks' yuan liquidity in its latest effort to fend off increased international competition for a slice of the offshore yuan business pie.
SCMP, July 26
Somehow I get the feeling that we are not told the entire story here and that what we really see happening is an HKMA, now the world's chief yuan cheerleader, making a valiant effort to inspire a tiring currency.
We start with the evidence of the first chart. It shows a huge reversal of China's capital flows last year.
From a net inflow of US$252 billion in 2011, the figures changed to a net outflow of US$97 billion in 2012.
[Technical note for those so-minded: I have treated errors and omissions in the balance of payments as capital flows here because that's what they are in practice.]
We do not yet have any figures for 2013, but the leading indicators in foreign reserve movements, trade performance, and foreign financial offerings all suggest these capital flows remain steeply in negative territory. For instance, there has recently been a notable sell-off in the offshore yuan debt instruments known as dim sum bonds, with yields rising to almost 6 per cent and no new issuance for six weeks.
To counter the trend, Beijing has resorted to showy reforms such as doing away with the lower limit on interest rates for yuan loans, which means nothing when the pressure on interest rates is actually up, not down, and to steadily intervening in the foreign exchange market to support the yuan. Let the yuan crumble and the capital outflow will turn into a flood to rival those photos we have seen recently of water releases from dams on the Yellow River.
Naturally the HKMA was also called on to do its bit and it has thus announced both an overnight and a one-day window of yuan funding for banks. It wants Hong Kong to keep its primacy of place in that torrent of money pouring into China, you see. Uh-huh.
Let's put the Hong Kong offshore yuan market into perspective. The bar on the left of the second chart represents the yuan deposit base of China's financial system, the bar on the right total outstanding deposits of yuan in Hong Kong.
Yes, the 700 billion yuan held here is a big number for a small place, particularly as it was only 70 billion yuan three years ago. But it is still a small number for a big place that has a deposit base of 100 trillion yuan.
And Hong Kong represents three quarters of the offshore yuan market. This gives you a total offshore yuan market amounting to less than 1 per cent of the onshore market. Anyone really care to play trivial pursuits?
It's simple. The financial affairs of China are centred on China, not anywhere abroad, and at the moment they show a greater stage of turbulence than they have experienced for several years or than many people had expected... but could have anticipated. The turbulence is the inevitable outcome of years of centrally directed misallocation of capital.