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.