May 25, 2018 / 6:27 AM / a year ago

China's offshore money rates rise ahead of MSCI inclusion

    SHANGHAI, May 25 (Reuters) - Offshore yuan money market
rates rose this week ahead of the inclusion of Chinese stocks in
MSCI indexes, which is expected to drive strong demand for the
currency, although analysts say recent central bank moves will
prevent a liquidity crunch.
    One-year forwards on the offshore yuan, or CNH,
stood at 915 points on Friday afternoon, compared with its
closing price of 850 points a week earlier. The price of
one-year offshore yuan forwards has fallen by about one-third so
far this year.
    MSCI said on May 15 that it would include 234
yuan-denominated stocks, or China A-shares, in its benchmark
Emerging Markets and All Country World Index indexes from June
1. The inclusion will represent an aggregate weight of 0.39
percent in the MSCI Emerging Markets Index at an
initial 2.5 percent partial inclusion factor.
    Inclusion is expected to lead to a surge in foreign money
flows into the A-shares, with the bulk of flows taking advantage
of cross-border stock connect schemes with Hong Kong. To head
off a crunch caused by spiking demand for offshore yuan, the
People's Bank of China (PBOC) last week introduced measures to
support cross-border fund flows, allowing banks involved in
offshore yuan clearing and settlement to tap onshore liquidity.

    "The changes should greatly relieve liquidity pressure on
the offshore CNH market, and reduce the upside risk to CNH
forward points," said Frances Cheung, head of macro strategy for
Asia at Westpac Institutional Bank in Singapore.
    "In particular, offshore investors under Stock Connect are
allowed access to onshore FX market for funds and FX hedges.
This should mean the renminbi funds for northbound flows can be
sourced from onshore CNY, not necessarily withdrawing liquidity
from CNH," she said.
    The cost of borrowing yuan in Hong Kong eased over the
course of the week, with the rate for overnight contracts
 at 3.21467 percent on Friday, from 3.37367 percent
a week earlier.
    As well as helping to avoid an offshore crunch, improved
onshore access is likely to support the onshore yuan's value.
    "We expect the CNH-CNY spread to narrow as part of the CNH
buying flow for A-share would divert to CNY market," said Ken
Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
    The spread between onshore and offshore rates was at 54 pips
early Friday afternoon, with CNY trading at a discount to CNH.
    Primary onshore money rates rose this week as the PBOC
drained a net 30 billion yuan from money markets. 
    The volume-weighted average rate of the benchmark seven-day
repo traded in the interbank market, considered
the best indicator of general liquidity in China, was 2.7808
percent. That is 8.5 basis points higher than the previous
week's closing average rate 2.6962. 
    The Shanghai Interbank Offered Rate (SHIBOR) for same tenor
rose to 2.7940 percent, up 2.6 basis points from the previous
week's close of 2.7680 percent.
    The one-day or overnight rate stood at 2.5069 percent and
the 14-day repo stood at 3.7326 percent.
 Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.5069      2.5141      -0.72                      0.00
 Seven-day        2.7808      2.6934      +8.74                      0.00
 14-day           3.7326      3.7937      -6.11                      0.00
 Shanghai stock exchange repo market
 Overnight        3.2500      2.7300      +52.00                     220,628.3
 Seven-day<CN7DR  4.4900      3.7300      +76.00                     42,568.90
 14-day           3.9150      3.7000      +21.50                     2,818.70
 PBOC Guidance Rates
 Overnight        2.5200      2.5300      -1.00                      
 Seven-day        3.0000      2.7500      +25.00                     
 14-day           3.8000      3.8200      -2.00                      
 Overnight        2.5280      2.5300      -0.20                      
 Seven-day        2.7940      2.7510      +4.30                      
 Three-month      4.2150      4.1930      +2.20                      
 Instrument            RIC         Rate          Spread vs 1 yr
                                                 official deposit
 2 yr IRS based on 1   CNABAD2YF=        0.0000              -1.5
 year benchmark                                  
 5 yr 7-day repo swap  CNYQB7R5Y=        3.5550               n/a
*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise

China FX and money market guide: 
 China debt market guide:
 SHIBOR rates:
 Reports on central bank open market operations:
 New Chinese debt issues:
 Prices for central bank bills, treasury bonds and sovereign
 Overview of China financial market data:

 (Reporting by Andrew Galbraith and Winni Zhou; Editing by Sam
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