Why more RMB looks Hong Kong bound

" As the PBoC continues to support CNH, the RMB's inter-bank interest rates in Hong Kong are expected to remain systematically higher."
Chaw Ming Quek, Head of transaction banking | ANZ Hong Kong

The central bank has instated a reserve requirement ratio (RRR) in the offshore RMB market for banks on offshore RMB (CNH) clearing for the first time, at a similar level to the 17.5 per cent onshore (CNY) rate, widely interpreted as a bid to reduce speculation.

The earlier intervention in CNH had caused a temporary liquidity squeeze which saw the RMB Hong Kong Interbank Offer Rate (HIBOR) spike to 67 per cent per annum for overnight funds, catching out short-sellers.

The CNH intervention came as the gap between CNH and CNY rates widened to the highest level seen in five years. On January 8, CNH was trading at 6.74 versus CNY at 6.60 against the USD as market participants bet that CNY would depreciate.

Even though HIBOR has since relatively stabilised, Hong Kong now looks an attractive location to place RMB deposits. Institutional investors are mobilising deposits from China to Hong Kong.

For a long time investors simply assumed China would offer the best RMB yield. When China first allowed the currency to be moved out via inter-company loans in 2013 there was limited enthusiasm amongst investors.

Now as the PBoC continues to support CNH the RMB's Inter-bank interest rates in Hong Kong are expected to remain systematically higher.

The RRR just announced is yet another lever PBOC can utilise to push up RMB HIBOR if needed to deter short-selling of RMB. It is a timely tool to regulate CNH liquidity given the expected increased inflows from China.

Nowadays, corporates can move RMB legitimately from China to offshore via trade payment or cross-border cash management solutions.

I would not be surprised if the PBoC tightens some of these channels to control speculative or excessive outflows, although genuine trade payment should not be affected.

Chaw Ming Quek is ANZ's head of transaction banking in HK