Cross-border service to tap yuan

The Monetary Authority has teamed up with Euroclear Bank and JPMorgan to launch a cross-border platform to allow international banks to more easily tap yuan funds in the city.

Under a deal signed between the HKMA and the other two banks yesterday, the three parties will next Monday provide a cross-border repurchase (repo) platform that lets banks that deposit bonds into any one of them use the bonds as collateral for short-term funding in yuan, Hong Kong dollars, US dollars or euros.

Euroclear has US$28 trillion worth of assets while JPMorgan has US$17.9 trillion worth of assets deposited by other banks that could be used as collateral for lending.

HKMA deputy chief executive Peter Pang Sing-tong said the new platform is particularly important for Hong Kong as it sought to act as a leading offshore yuan trading centre.

'Under the new platform, international banks that have US treasuries or other bonds deposited in Euroclear Bank or JPMorgan can use the bonds as collateral to borrow from a Hong Kong lender in yuan or Hong Kong dollars,' Pang said.

'This would strengthen Hong Kong's role as a centre for international institutions to tap the yuan for their clients in order to settle trades or to invest in any yuan investment products. This would be useful for overseas banks as now there are an increasing number of cross-border trades settled in yuan while there are also increasing numbers of issues of yuan-denominated 'dim sum' bonds.'

Hong Kong banks had 674 billion yuan (HK$828.3 billion) of customer and institutional investors' deposits as at the end of April, the biggest yuan pool outside the mainland.

While most international banks have deposited their bonds in either Euroclear Bank or JPMorgan, few Hong Kong lenders have a relationship with these two lenders and cannot accept their bonds as collateral for yuan loans.

The new platform will establish that link and add new channels for Hong Kong lenders to lend out their yuan on hand. In addition, international firms that want to tap yuan funds could also have an additional channel to tap the yuan.

Pang said more than 30 Hong Kong banks and about 10 international banks had expressed interest in the platform.

Euroclear Bank Asia-Pacific regional head Olivier Grimonpont said banks, pension companies and hedge funds were also expected to use the platform's cross-border repo services.

JPMorgan managing director and head of technical sales of Asia ex-Japan Kirit Bhatia said developed capital markets had daily repo outstanding volumes as high as 40 per cent to 50 per cent of GDP, but in Asia, the repo volume was less than 2 per cent of GDP.

He said the new platform would encourage take-off of the repo system in the region.