April 10, 2014 / 5:25 AM / in 4 years

CNH Tracker-Gradual RMB-fication of Hong Kong gathers steam

By Saikat Chatterjee
    HONG KONG, April 10 (Reuters) - Hong Kong's role as an
international financial centre is rapidly getting a Chinese
    In the past few months, financial institutions in the former
British colony are increasingly leaning more on their China
businesses as local opportunities flounder while the city's
regulators are moving quickly to seal long-standing initiatives.
    Nearly one out of every five dollars that Hong Kong banks
lend now find their way into non-banking entities on the
mainland, a dramatic rise in the last few years, particularly
after regulators unveiled the cross-border yuan trade settlement
scheme in 2010. The proportion was tiny before that.
    While that rise is natural given Hong Kong's role as a
premier offshore yuan hub and a gateway into China, it is also
indicative of how rapidly the city's banks are leaning on their
China business for long-term survival and growth.
    Last week, Hong Kong's stock exchange said it was
exploring a closer relationship with mainland bourses that would
allow mainland investors to buy Hong Kong shares directly and
vice versa, although it clarified on Thursday that any such
scheme was "months" away.
    Regulators are also putting the finishing touches on a
landmark deal that would allow money managers to base their
operations in Hong Kong to target the huge onshore market and
allow Chinese fund houses to use the territory as a platform to
sell funds to global investors.
    The opportunities are huge. Deposits and bonds outstanding
in the offshore yuan market account for about 1 percent of the
onshore market, indicating the development of the market remains
at an early stage.
    With the penetration of institutional money management in
China's household savings sector relatively tiny, it presents an
array of opportunities for the nearly $2 trillion fund
management industry in the city.
    This also comes at a time when China is taking rapid strides
to reform its financial sector as it allows market forces to
have a greater say in its capital markets and boost the process
of internationalising its currency.
    It is not the first time China and Hong Kong are exploring a
closer relationship between their markets.
    Vivian Deng, chief China representative at Newedge, a
leading derivatives brokerage firm, points to an initiative to
let investors buy mainland-listed stocks a few years ago that
was shelved.
    In 2007, China's regulator announced a pilot plan from
Tianjin for allowing domestic Chinese individuals to invest in
overseas securities markets directly, but it was shelved on
concerns that equity markets had raced up to frothy levels.
    Recently, Chinese investors have been increasingly using an
outward direct investment programme to invest in overseas
markets with global funds using foreign currency and renminbi
currency quotas to invest in the onshore capital markets.
    That indicates regulators in Hong Kong and China are now
warming to allowing more cross-border investment flows,
potentially boosting the growth of the offshore yuan market.
    "The cooperation between HKEx and the Chinese stock
exchanges will definitely be an encouraging development to
bridge the gap between China and Hong Kong," said Deng. "It's a
matter of time and readiness in terms of infrastructure
    * Saxo Bank is launching over-the-counter foreign currency
options in the offshore yuan currency against the U.S. dollar.
Presently, Saxo offers trading in the offshore yuan in spot and
forwards against the major currencies.
    * Offshore yuan trading has remained a bright spot for
currency trading platforms. Thomson Reuters said offshore
trading in the yuan on both of its venues has climbed to record
highs, putting it in the top four traded pairs on Matching and
top 10 on FXAll. The company does not give any breakdown of
actual volumes traded in particular currencies.
    * HSBC has appointed Candy Ho as the global head of
RMB business development in markets. Before this role, she was
the head of RMB business development in Asia Pacific since March
2011 and key in building up the bank's business in the region.
    * Investors are back sniffing for good deals in the dim sum
bond space. Order books for China Unicom (Hong Kong) 
new three-year offshore yuan bonds have swelled past the 4
billion mark. The initial price guidance on the bond is about
4.25 percent.

    CHART OF THE WEEK: Quarterly issuance of dim sum debt: link.reuters.com/kyr38v
    Dim sum debt sold in the quarter that ended in March
amounted to 125 billion yuan ($20 billion), the highest
quarterly level on record, according to Thomson Reuters data.
That compared with 53 billion yuan for the December quarter.   
CNH Tracker-European yuan business to get boost from London,
Frankfurt clearing 
China 'dim sum' bonds mark record quarter in Hong Kong
Hong Kong banks raise deposit rates to boost offshore yuan pool
More stories about the CNH market                 
Daily onshore yuan reports                        
Daily China money market reports                  
Offshore yuan rate    Onshore yuan rate  
Offshore yuan dealt Onshore yuan on CFETS 

 (Additional reporting by Michelle Chen; Editing by Chris
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