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Foreign Exchange

HKMA: offshore/onshore renminbi price difference to remain

The Hong Kong Monetary Authority (HKMA) says the price disparity between the offshore and onshore renminbi will continue but should close as the financial systems of Hong Kong and China integrate, according to Asiamoney, a sister publication to Euromoney FXNews.

The separation of Hong Kong and China’s financial system and differing investors views between investors of the offshore renminbi (CNH) and onshore renminbi (RMB) will continue drive the discrepancy between the prices of the two-related currencies. This will continue to be the case for the time being but the difference in valuations should shrink as China continues to liberalise its economy and as Hong Kong and China’s financial markets become more integrated, says the HKMA.

The HKMA adopted a framework to understand the dynamics of the market in its half-yearly Monetary and Financial Stability Report published on March 22 in which asset values are determined by investors.

It believes that the valuation of the two currencies is affected by investor perceptions about the macroeconomic outlook for China, including monetary policy and market sentiment. The different valuations stems from the discrepancy of information sets used by Hong Kong and mainland investors.

HKMA analysis shows the difference in prices between CNH and RMB are at their greatest when investor views, as measured by observing data on equity prices, exchange rates as well as macroeconomic and balance sheet information, are at their most divergent.

This relationship was at its most extreme in the period after the Lehman Brother default in late 2008. The dispersion of investor views was highest as recorded by the HKMA at over 3%, while the spread between the onshore deliverable forward (DF) and the offshore non-deliverable forward (NDF) was in excess of 350 basis points (bp).

More recently, a few months of 2011 witnessed a combination of negative market sentiment over concerns about the ongoing European debt crisis, US jobs and the impact that these might have on China growth.

This led to another rise investor divergence from 1% to 1.5% as measured by the HKMA. In the tandem the spread between onshore DF and the offshore NDF increased from 0.5% to 1%.


 Disparity between DF and NDF prices
 and dispersion of investors' views 

 
 Source: HKMA

Even though price disparity does and will continue to exist between the two currency rates and is most extreme at times of market stress, the HKMA found that there is a self-correcting mechanism. This mechanism means that the two currencies will tend converge over time, with the RMB acting as an anchor for the CNH rate when the latter deviates in an extreme way.

The most recent evidence of this was in September 2011 when the offshore rates blew out to almost CNH6.55 per dollar from the CNH6.40 mark and began trading at a premium to the onshore rate as European debt and global growth fears spooked the market. In contrast, the onshore rate displayed a lower level of volatility.

However volatility in the offshore market does not appear to cause any prices anomalies on the onshore market.


 CNH and CNY rates from July to December 2011

 
 Source: HKMA


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