China bill sales will boost yuan by expanding investment options in Hong Kong
Central bank move to sell short-term securities in the city may signal start of separate monetary policy for the offshore market
China’s decision to sell short-term yuan-denominated securities in Hong Kong may pave the way for a regular programme, analysts say, that would create a separate “offshore” monetary policy allowing the central bank to better manage yuan liquidity outside the mainland.
Sales of short-term bills through the People’s Bank of China’s (PBOC) regular open-market operations have long been a key liquidity management tool to absorb excessive cash from mainland banks when the central bank wanted to curb inflation or an overheating economy.
In the same vein, the PBOC has the flexibility to redeem its bills on maturity instead of rolling them over, resulting in a money injection back into China’s financial system to boost economic growth.
In Hong Kong, PBOC bill sales would expand the number of yuan investment options for investors while resulting in a withdrawal of funds from the banking system. The tighter yuan liquidity would have the effect of supporting the value of the currency in the city.
The exchange rates of both onshore yuan traded in China, and offshore yuan traded outside the mainland, have consolidated into a narrow range between 6.8 and 6.9 against the US dollar this month, halting the currency’s 9 per cent slide since April after the central bank took a number of measures to support the currency.
The Chinese authorities were reported to have intervened in Hong Kong’s market to make it more costly to short – or bet against – the offshore yuan.
“The PBOC may have two monetary policies to manage liquidity: one for the onshore market and the other for offshore. This could become quite influential,” said Frances Cheung, head of macro strategy for Asia at Westpac Banking Corp.
Beijing’s ambitions to internationalise the yuan, also known as the renminbi, mean it is also eager to expand yuan investment products that can be bought by foreigners, especially since the supply of corporate and government yuan bonds in the offshore “dim sum” market has dwindled in recent years.
Total yuan bonds sold outside the mainland stood at US$9.8 billion equivalent in yuan in 2017, less than half the US$21.9 billion equivalent in 2016, according to Thomson Reuters data.
“The issuance of PBOC bills in Hong Kong aims to enrich the spectrum of renminbi financial products of high credit rating in Hong Kong, improve the yield curve of renminbi bonds [in the city] and support the development of offshore renminbi business [in Hong Kong],” the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, said last month.
The nation’s “Greater Bay Area” economic initiative also points to the possibility of freer cross-border flows between Hong Kong and China, analysts said. Under the initiative, individuals, banks and merchants from Hong Kong may find the yuan easier to access and use for pricing, trade and investment needs.
Norman Chan Tak-lam, chief executive of the HKMA, said last week that Hong Kong residents would soon be able to open mainland bank accounts remotely and move small amounts of cash using the internet payment systems.
Internet giant Tencent Holdings on Wednesday announced it would launch a cross-border mobile payment service on its platforms WeChat Pay HK and Tenpay, in partnership with credit card firm UnionPay, starting from October. Hong Kong users will be able to convert their yuan payments on the mainland back into a Hong Kong dollar balance in their WeChat Pay HK wallet account that provides exchange rate quotes and automatic exchange services.
“Potentially, buyers of RMB bills will need to get the currency in Hong Kong first. The settlement of the RMB goes to their bank account or they may want to remit their RMB funds to China if they have a bank account there,” said Christy Tan, head of markets strategy and research at National Australia Bank.
But the big question remains: how much yuan will China be willing to release into offshore markets while large amounts of money are still trapped inside the mainland because of government capital controls?
Clues about the pace of any easing in capital controls may come from the size and frequency of the PBOC issues in the future. Details have not yet been announced.
Yuan liquidity in Hong Kong has gradually improved this year, with total yuan deposits in Hong Kong rising by 14 per cent year on year to 607 billion yuan (US$88.2 billion) in July, but they remain well below their peak of 1 trillion yuan in December 2014.
“As long as capital controls remain a major hurdle, the two onshore and offshore yuan debt markets will see differences in terms of liquidity and participants,” said Judy Kwok-Cheung, a fixed income analyst at Bank of Singapore.
Hong Kong’s Basic Law, often referred to as the city’s mini-constitution, makes clear that the government of Hong Kong, and not the mainland government nor the PBOC, should formulate the city’s monetary and fiscal policies.
But joint regulation of the two economies is now probably being considered to strengthen risk controls in the financial systems as Beijing continues to open up its markets amid mounting US-China trade tensions and the outlook of higher interest rates from the US Federal Reserve.
“At this point there are so many uncertainties in regards to the US-China trade war, [the new short-term bills] is one way to be prepared for some kind of a shock to the liquidity system and the offshore yuan,” National Australia Bank’s Tan said.