The convergence of onshore and offshore renminbi rates shows that China’s capital controls are becoming less effective and funds are flowing more freely, but the lack of a unified interbank interest rate remains a hindrance to the development of new products.
The first convergence of CNH Hibor – the offshore renminbi interbank interest rate - and Shibor – its China equivalent - was in May , though the two quickly diverged again. However, the rates appear to be on a long-term convergence trend with the gap between the two narrowing from an average of 217 basis points (bp) in January-May to 76bp in June-October. This shows that the onshore rate is starting to affect the offshore rate and also that the efficiency of China’s capital controls is starting to reduce, argues Li-Gang Liu, chief economist, greater China at ANZ.
"CNH Hibor appears to have converged rapidly towards the onshore interbank rate Shibor, after a one-way bet of RMB appreciation disappeared," he said in a report published November 20. "It appears that the onshore interest rate has started to influence the offshore CNH rate as well, which is also consistent with our previous finding that China’s capital control effectiveness, though still effective, has started to decline over time."
Sources: Bloomberg, TMA, ANZ
However the method used to obtain CNH Hibor and the lack of a single pricing benchmark remains a headwind to the expansion of offshore renminbi products.
The offshore market applies a standard swap offer rate formula (or interest rate parity condition) to derive CNH Hibor with each bank setting rates taking into account their own liquidity needs. However Liu says this approach has its limitations because it can only populate the short-end of the yield curve as tenors of the FX forwards tend to be short.
"Time value of RMB funds may not be clearly reflected. This will hinder the development of the CNH loan market," he said.
F is forward rate; S is spot rate; d is the number of calendar days for day count adjustment; t is tenor and t=0 is spot.
As it stands, 13 banks provide rates for CNH Hibor via the Treasury Markets Association for tenors of overnight, one week, two weeks and well as 1,2,3,6,9 and 12 months. However unlike Shibor and other international interbank rates, no single market rate is quoted.
"The market still lacks a single benchmark, similar to HKD Hibor, that can facilitate the product development. All these issues need to be addressed quickly so as to enhance the efficiency of the CNH Hibor market," he said. "For example, multi-bank credit lines and swap markets will need to be established before banks can better manage their own CNH liquidity conditions before tapping into the liquidity facility at the Hong Kong Monetary Authority."
Sources: TMA,ANZ