The offshore renminbi market is about to enter a new phase of greater liquidity and cross-border flows if reports of new measures to enhance the market come true, say analysts. Chinese language media reports that when Chinese president Hu Jintao visits Hong Kong to mark the anniversary of the handover of on July 1, he will announce a number of changes to the offshore renminbi (CNH) market.
These include: relaxing the current Rmb20,000 ($3,150) daily conversion limit for individuals with Hong Kong ID cards; allowing cross-border renminbi lending in the Qianhai economic zone in Shenzhen; permitting Chinese high-net-worth individuals to invest in Hong Kong; and the launch of Hong Kong offshore exchange-traded-fund investing in Chinese securities via the renminbi qualified foreign institutional investor (RQFII) scheme.
If the daily conversion is relaxed, the expectation is that the changes will allow individuals to convert renminbi at the CNH rate, rather than the onshore renminbi rate as they are required to do so now. The Rmb20,000 limit could also be lifted, boosting renminbi liquidity in Hong Kong.
“[Increasing offshore liquidity] could be done in many ways,” says Nathan Chow, an economist at DBS. “They could lift the existing conversion limit or allow individuals to directly convert through the CNH rate, or they might allow non-residents to open renminbi accounts.
“I would say, as a wild card guess, they will allow an expansion of the minimum conversion rate to Rmb80,000, as the Chinese authorities find it difficult to completely let go of all the controls.”
A China economist at an investment bank is even more bullish on the prospects for the relaxation of the conversion quota.
“Basically, banks have been crying out for a relaxation of the quota to allow individuals to convert RMB more flexibly,” he says.
“There is no limit for institutional clients who want to convert renminbi at the CNH rate, so I don’t know why they would impose a limit on individuals. They might want to have a limit as a consumer-protection measure but it will be higher than the current Rmb20,000.”
However, there is some scepticism in the market about whether there is demand from individuals for a greater daily allowance, and the weakening expectations for renminbi appreciation could reduce participation.
“The current limit is not fully utilized, and given expectations for a stable renminbi I don't expect this would lead to sudden pick up in exchanges into the currency,” says Frances Cheung, senior strategist Asia ex-Japan, Crédit Agricole.
Qianhai effect may be more significant
The introduction of cross-border lending in the Qianhai economic zone is expected to have an even greater impact on liquidity in CNH market.
“If cross-border RMB lending is allowed to go ahead, it will be a win-win situation,” says Chow. “The onshore companies will have access to cheaper RMB funds in Hong Kong. And Hong Kong banks will be able to boost their RMB lending.
“This means competition between banks will increase, pushing up the rates on deposits, which will facilitate the growth of deposits. If this does happen, though, it will be on a quota system – it won’t be a situation where the flood gates are opened.”
However, the China economist believes the plans for Qianhai are more speculative, as the zone is yet to be given the green light by Beijing.
“In terms of the Qianhai, I am not sure this will be announced formally, as the economic zone is yet to be approved by the NDRC [National Development and Reform Commission],” he says. “Any decisions in terms of capital-account liberalization are not made by local governments but done by the central authority.”
Improving liquidity in the CNH market has been one of the priorities of authorities in Beijing and Hong Kong this year. Deposits have fallen for five months in a row to May as ever more avenues haven opened up for individuals and investors to put their renminbi to work.
These include increasing use of the currency for cross-border trade and the broadening of repatriation mechanisms, such as RQFII and QFII.
Already this year, the Hong Kong Monetary Authority has moved to establish a repo market for offshore renminbi and relaxed limits on net open positions (NOP).
“The government is thinking about ways to improve liquidity,” says Chow. “The development of Hong Kong as an offshore centre is now evolved into a second stage. The focus is on expanding the loan business of banks in Hong Kong.
“The changes to the NOP position and the calculation of the liquidity ratio – these are policies to boost lending.”