CNH Tracker-Trade settlement to shrink offshore RMB discount
By Saikat Chatterjee
HONG KONG, Oct 6 (Reuters) - The yuan traded in Hong Kong has been unusually weaker than its mainland counterpart but will probably narrow the gap next week when China reopens for business after a long holiday and companies take advantage of this market dislocation.
The yuan traded in Hong Kong , or "CNH", usually trades at a premium to the onshore rate because of the limited supply of CNH outside of China. CNH is freely convertible outside the mainland.
A steep, late summer selloff in riskier assets such as Asian bonds and currencies, along with the illiquid trading conditions in Hong Kong that hampered cross-border trade settlement, caused a discount to open up between the two markets two weeks ago for the first time since its birth in June 2010.
As markets recovered somewhat this week, the discount has narrowed to less than 0.7 percent from a record 2.6 percent on Sept. 25, but still at elevated levels.
Further narrowing in the CNH/CNY spread would ensure more orderly growth of the offshore market and would smooth out cross-border trade flows.
With Chinese stocks listed in Hong Kong and dollar bonds of mainland companies benefiting from a short squeeze on Thursday, this gap may narrow more and eventually converge, barring an ugly turn in the euro zone debt crisis.
Since the offshore market's launch, whenever CNH has widened 1 percent from CNY in the spot market offshore subsidiaries of Chinese companies have stepped in to arbitrage the gap.
In October 2010, when demand for offshore yuan skyrocketed because of a temporary shortage, offshore subsdiaries of mainland importers settled their trade in Hong Kong, causing the gap basically to disappear in around two weeks.
Indeed, at the depths of the CNH selloff late last month, currency traders said there were also some heavy dollar selling against the offshore yuan near its lows.
Yuan-denominated trade settlement has grown at a healthy pace. Trade settled in yuan as a percentage of total China trade grew to 10 percent in the second quarter compared to less than one percent in the first quarter of 2010.
WEEK IN REVIEW:
* Feeling the heat. Expectations that the Chinese currency will strengthen in the medium-term could put pressure on Hong Kong banks' ability to increase loans as more depositors choose to keep money in yuan, KPMG's head for financial services in the territory Martin Wardle said this week. Such a development would likely push up interest rates in the city as demand for loans grows more quickly than do new Hong Kong dollar deposits.
* More quotas. After a severe pounding last week, authorities got into the act. Beijing doubled the quota for settling cross-border yuan trade to eight billion yuan for the last quarter. While the quota will help in reducing market volatility for now, market players said more structural reforms are needed such as a central bank clearing authority.
* Navigating the waters. Amid the market turmoil in the CNH markets, mainland shipping company Sinotrans Shipping sold a 2.6 billion yuan ($406 million) three year bond at 3.3 percent. Bank of China Hong Kong, BOC International, Agricultural Bank of China and Wing Lung Bank were joint bookrunners of the deal.
* While the gap between the yuan traded in Hong Kong and mainland has narrowed sharply, the weakness in CNH has sent investors scurrying to high grade credits. Morgan Stanley says it prefers high quality dim sum credits over high yield names since the CNH credit quality curve is too flat and doesn't compensate investors for going down the quality curve.
CHART OF THE WEEK:
CNH deposits in HK grow: link.reuters.com/mus24s
Even as concerns about the euro zone debt crisis and the global economy kept investors preoccupied, offshore yuan deposits in Hong Kong banks have grown at an impressive pace. One out of every ten dollars of deposits in Hong Kong banks are now denominated in yuan.
YTD dim sum bond issuance:
Book runner: Proceeds (RMB mln): # of issues:
1. HSBC 29,355.0 57
2. Standard 16,281.3 36
3. Bank of China 8,281.7 13
4. Deutsche Bank 8,117.6 14
5. RBS 7,338.5 18
YTD synthetic RMB bond issuance:
Book runner: Proceeds (RMB mln): # of issues:
1. Deutsche Bank 4,679.2 4
2. Citi 2,912.5 2
3. Bank of America 2,312.5 1
4. Bank of China 2,312.5 1
5. HSBC 1,248.5 2
* Thomson Reuters data as of October 6
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<0#CNHBOND=> (Additional reporting by Nethelie Wong with IFR; Editing by Kim Coghill)
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