HKMA offers short-term yuan liquidity

The Hong Kong Monetary Authority (HKMA), the city's de facto central bank, said that it will provide one-week yuan funds to the city's lenders upon their requests on presentation of eligible and acceptable collateral to enable them to further boost the short-term yuan liquidity to counter any Chinese currency shortage that may arise from time to time.

According to a HKMA statement on Thursday, the facility, which will take effect from June 15, will make use of the currency swap arrangement between HKMA and the People's Bank of China (PBOC) to carry out the plan.

Banks could use the facility to manage their short-term liquidity and may roll over the borrowings if needed, the HKMA added.

The swap line between HKMA and PBOC is the biggest at 400 billion yuan among the many swap lines Beijing has signed with various central banks around the world.

"However, this facility should not be regarded as a steady source of funding for their business.

The HKMA will keep the terms and conditions of the facility under constant review, and where appropriate, make refinements in (the) light of the experience in operating the facility," the HKMA statement said.

"The facility serves to address short-term liquidity tightness that may arise from time to time, for example, due to capital market activities or sudden need for yuan liquidity by local banks' overseas bank customers. This would help enhance market confidence and support the long-term development of the offshore market," said Peter Pang, deputy chief executive of the HKMA.

"The offshore RMB market in Hong Kong has been growing healthily in the past two years. The introduction of the facility is to support the continuous deepening of the yuan capital market in Hong Kong and to reinforce Hong Kong's role as the global hub for offshore yuan business," Pang added.

The HKMA also announced that it has decided to replace the 25 percent yuan risk management limit with a 25 percent yuan liquidity ratio. The yuan liquidity ratio will allow for inclusion of more yuan liquid assets in the calculation.

Local yuan deposits in April 2012 fell for the five consecutive months to 552 billion yuan from the historical peak of 627 billion yuan in last November. This was due to the expansion of other yuan investment products such as Renminbi Qualified Foreign Institutional Investor (RQFII) and yuan-denominated bank certificates.

"This is likely in response to the shrinking yuan liquidity pool in the city. The facility is like a repo arrangement which is encouraging as we move towards an establishment of a yuan repo market which is lacking right now. The haircut is reflecting the fact that some HKD-denominated papers are eligible collateral against a yuan facility," said Frances Cheung, a senior strategist at Credit Agricole in Hong Kong.