The Hong Kong Monetary Authority’s (HKMA) announcement last Friday about further refinements to existing offshore renminbi (or CNH) market regulations in Hong Kong is highly significant, both with regard to its implications for the development of the offshore renminbi market as well as its impact on CNH/CNY market dynamics, according to Deutsche Bank’s CNH Market Monitor.
“We think that the new regulations to enable intra-group consolidation of trade-related renminbi positions will help to facilitate the global expansion of renminbi trade settlement,” said the bank. “The net open position (NOP) rule changes will increase the capacity to which Hong Kong banks can expand their CNH foreign exchange derivatives businesses. In particular, the trading volume of CNH FX swaps should pick up significantly.”
Until now, Hong Kong participating banks in the renminbi trade settlement scheme have been unable to consolidate renminbi positions in their offshore branches and affiliates within the same banking group. Instead, offshore units intending to provide direct renminbi trade settlement services for clients have been required to set up clearing accounts with the renminbi clearing bank, Bank of China (HK). “However, the latest regulation changes will help improve the efficiency and reduce the cost of renminbi clearing and risk management for participating banks. This will encourage banks to promote renminbi services more actively, which in turn would encourage a greater adoption of direct renminbi settlement by the international business community,” said the report.
In addition, changes to net open positions will increase Hong Kong banks’ capacity to expand their renminbi FX derivatives businesses, as previously their ability to run FX swap positions was restricted. This is particularly the case with regard to trading activity in offshore renminbi FX swaps which should pick up significantly, according to the bank. “Banks used to be constrained by the December 23, 2010 NOP regulations in running larger FX swap positions to fund their long positions on renminbi bonds or other investments. As such, some banks were forced to move some of their FX swap positions to other offshore accounts. The new calculation of NOP effectively allows participating banks to run larger carry positions,” the Monitor stated.
The report also noted that following the announcement, US dollar/CNH forwards moved higher by nearly 100 bps, while spreads between the onshore and offshore spot rates widened by about 40 bps.