UPDATE 1-Hong Kong enhances liquidity windows for offshore yuan

Thu Jul 25, 2013 6:39am EDT

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By Michelle Chen

HONG KONG, July 25 (Reuters) - Hong Kong's central bank said it would offer overnight and one-day cash to banks involved in offshore yuan trade, in a move to safeguard against any cash tightness in the offshore market.

The Hong Kong Monetary Authority (HKMA), the city's de-facto central bank, said it stood ready to offer up to 10 billion yuan, in total on a single day, using its own sources of yuan funds, to meet banks' emergency liquidity needs.

Last month, the offshore market caught the backwash from a cash crunch in mainland China markets, where short term rates briefly spiked as high as 30 percent.

In addition to an overnight facility, the HKMA said will also provide funds for one day on a T+1 settlement basis by using its 400 billion yuan currency swap line with the People's Bank of China. The yuan is officially called the renminbi, or RMB, and sometimes referred to as CNH in its offshore form.

"The HKMA's introduction of two enhancements to the RMB liquidity facility will strengthen liquidity management of banks participating in the RMB business and support further development of Hong Kong as the hub for offshore RMB business", Norman Chan, Chief Executive of the HKMA said in a statement.

The HKMA had hitherto offered banks liquidity funding through a seven-day facility that appeared to be unpopular with market participants because of its longer tenor, and high borrowing costs that they believed were based on onshore rates.

Becky Liu, a strategist at Standard Chartered Bank said the provision of overnight and one-day facilities would offer more meaningful protection should onshore liquidity become unstable again.

At the height of the crunch on the mainland in June, offshore subsidiaries of Chinese lenders appeared draw on a nearly 700 billion yuan ($114.08 billion) deposit base in Hong Kong. As a result short-dated offshore yuan money market rates spiked higher and demand for bonds suffered.

The problem with the offshore deposit base in Hong Kong is that large Chinese banks and trade settlement financial institutions account for most of the deposit base, leaving small and medium sized lenders vulnerable to illiquidity in the interbank market.

The HKMA has had to take urgent action twice to alleviate liqudity shortages during the offshore yuan market's three-year history.

"The improvements to the renminbi facility should help to stabilize CNH funding rates and banks have more options now," said Pin Ru Tan, a rates analyst at HSBC.

For the press release, see: r.reuters.com/sen89t ($1 = 6.1360 Chinese yuan) (Additional reporting by Rachel Lee; Editing by Saikat Chatterjee and Simon Cameron-Moore)

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