April 17, 2014 / 7:36 AM / 4 years ago

CNH Tracker-New cross-border investment scheme seen boosting offshore yuan pool

By Michelle Chen
    HONG KONG, April 17 (Reuters) - China's decision to use its own currency to
settle recently-approved trading across the Hong Kong and Shanghai stock
exchanges is likely to become a promising channel to funnel yuan funds to the
offshore pool.
     The new scheme, under the tightly-controlled capital account, will
supplement yuan accumulation in Hong Kong via trade settlement, which until now
has primarily fuelled yuan deposits in the former British colony. 
     China's securities market regulator said last week it would allow
cross-border stock investment between Shanghai and Hong Kong, a small step
towards opening China's capital account and allowing Chinese individuals to buy
equities overseas.
    Hong Kong investment in mainland stocks will be limited to an overall quota
of 300 billion yuan and a daily quota of 13 billion yuan. While mainland
investment in Hong Kong stocks will be limited to a 250 billion yuan overall
quota and a 10.5 billion yuan daily quota. 
    It is the the first time mainland individual investors will be allowed to
invest in overseas securities markets with Chinese currency.
    The initial quotas are sizable compared to the existing channels that allow
yuan funds to flow out of China under investment schemes, namely renminbi
overseas direct investment (ODI) and renminbi qualified domestic institutional
investor (RQDII).
    China completed 85.6 billion yuan ($13.76 billion) worth of yuan-denominated
ODI over 2013, according to central bank figures, while not much progress has
been reported on RQDII actvity since it was authorised last year.
    Though analysts are divided on which of the two markets is more attractive
in terms of valuation, the Hong Kong market's superior liquidity and transparent
regulation will no doubt appeal to investors.
    Mainland investors are profoundly underinvested in equities, and only 12
percent of the total financial assets of Chinese households is allocated to
securities, compared to 44 percent in the U.S., said Nathan Chow, an analyst at
DBS Bank.
    "The underinvestment in equities by Chinese households could largely be
attributed to irregularities in the mainland markets. Issues such as
insider-trading and opaque reporting practices have eroded retail investors'
confidence," Chow said.
    Supplemented by this new scheme, the share of yuan deposits in Hong Kong's
banking sector is set to rise faster as the yuan internationalisation process
deepens, fuelling concerns among market players on the Hong Kong dollar's
    Hong Kong dollar's (HKD) liquidity has been declining at the expense of the
"redback" yuan. The market share of HKD deposits in the city's banking system
fell to around 49 percent in February from 53 percent four years ago when an
offshore yuan market came into being. The yuan's share jumped to more than 12
percent from only 1 percent over the period.
    With Hong Kong increasingly linked to China and becoming the offshore yuan
centre, speculation of a HKD re-peg to the yuan is likely to pick up again, said
Liu Linan, a strategist at Deutsche Bank.
    "We, however, think it is more likely that with the buildup of RMB liquidity
in Hong Kong and the increasing use of RMB as a trading and investment currency,
HKD will gradually be replaced by RMB in the long term," Liu said.

    * Industrial and Commercial Bank of China (ICBC) completed its sale of a 2.5
billion yuan dim sum bond on Wednesday. The 2 billion yuan two-year tranche was
priced at 3.2 percent and the 500 million yuan five-year piece was fixed at 3.9
percent, according to a term sheet seen by Reuters.  
    * Yuan deposits in Taiwan amounted to 268.4 billion yuan by the end of
March, up 8.6 percent from a month earlier, statistics from the island's central
bank showed. Yuan deposits made up 24 percent of total foreign currency deposits
as of end of February.
    * Chinese asset manager E Fund Management (Hong Kong) said it was partnering
with Bank SinoPac to launch two RQFII Funds, namely E Fund RMB Fixed Income Fund
and E Fund RMB Mainland China Bond Fund, further expanding into Taiwan's
offshore banking unit (OBU) wealth management business. 
    * BlackRock said on Tuesday it had been awarded its first Renminbi
Qualified Foreign Institutional Investor (RQFII) licence by the China Securities
Regulatory Commission (CSRC) to invest in the domestic capital markets in China,
including the A-Share equity and onshore bond markets. 
    * Yuan deposits at banks in South Korea rose to a record $7.9 billion at the
end of March, central bank data showed on Friday, and are expected to keep
rising as higher yields in China continue to attract South Korean investors.
   Inbound and outbound quotas of China's cross-border investment schemes: link.reuters.com/bev58v
CNH Tracker-Gradual RMB-fication of Hong Kong gathers steam 
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 
($1 = 6.2214 Chinese Yuan)

 (Editing by Eric Meijer)
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