Hong Kong’s clearing bank gains new funding access in yuan push

[HONG KONG] Hong Kong’s sole yuan clearing bank plans to issue interbank negotiable certificates of deposit (NCDs) in the mainland market, another step in Chinese authorities’ efforts to strengthen the city’s role as a hub for yuan business. 

Bank of China (Hong Kong)’s plan entails issuing up to 22.2 billion yuan (US$3.3 billion) of NCDs this year, with the quota already registered at the People’s Bank of China (PBOC), according a statement released Tuesday (Oct 13) by BOCHK.

These short-term debt instruments, carrying maturities of one year or less, are popular among onshore banks seeking to raise funds from peers. 

BOCHK would become the first offshore yuan-clearing bank to gain a quota for onshore NCD issuance, according to a statement from China’s Interest Rate Self-Regulatory Mechanism.

The bank is an offshore subsidiary of Beijing-based Bank of China. 

This move builds on efforts by mainland and Hong Kong authorities to cement the city as a leading yuan hub and promote the currency’s global status. With the yuan still not freely convertible, officials are bridging onshore and offshore liquidity to make it easier to run yuan-denominated business abroad.

BOCHK has been the only designated offshore yuan clearing bank in Hong Kong since 2003. 

“Allowing onshore NCD issuance would improve offshore liquidity, as otherwise the offshore yuan pool would need to be tapped,” said Frances Cheung, head of foreign exchange and rates strategy at Oversea-Chinese Banking Corp. “Over time, this may help anchor offshore yuan rates.” 

In July, Hong Kong Monetary Authority, the city’s de facto central bank, increased the size of a yuan-lending facility to local lenders. Earlier in the year, the PBOC also raised the cap on offshore loans for some banks.

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While growing liquidity has pushed yuan borrowing costs down in Hong Kong over recent years, they broadly remain above onshore rates.

The three-month NCD yield is currently at 1.41 per cent, compared to 1.67 per cent for the offshore yuan Hibor. The amount of yuan deposits in Hong Kong reached a record high of around 1.14 trillion yuan at the end of May and has since lingered near the level, according to official data.

The PBOC will support Hong Kong’s yuan clearing bank to obtain yuan funds through multiple channels in the mainland, including NCD, to boost offshore liquidity, PBOC deputy governor Zou Lan said at a forum in January, a state-backed newspaper reported. 

Eddie Yue, HKMA’s chief executive officer, also said in January that such a move will strengthen the clearing bank’s service capabilities and contribute positively to offshore yuan liquidity condition.

The addition of the NCD-funding channel will enable the clearing bank “to play a larger role and stabilise short-term liquidity under periods of liquidity stress”, said Becky Liu, head of Greater China macro strategy at Standard Chartered Bank. 

But the broader impact on offshore yuan lending is likely limited unless the scheme becomes more widely available to include all settlement banks, she added. BLOOMBERG