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Foreign Exchange

China-Taiwan RMB clearing agreement to reduce CNH liquidity

The implementation of a renminbi trade settlement clearing system between China and Taiwan is anticipated to exacerbate the already worsening CNH liquidity in Hong Kong, according to Asiamoney, a sister publication of EuromoneyFXNews.

Taiwan’s central bank has delivered an initial proposal for a clearing system for the renminbi that would allow Taiwan’s financial institutions to have a slice in the internationalisation process of the Chinese currency, according to various media organizations. While this may appear to be a positive development for the overall liberalisation of the Chinese currency, experts believe this could have a negative impact on Hong Kong’s onshore renminbi market, which has experienced tightened liquidity substantially over the last few months.

"It will be negative because Taiwanese customers are using the CNH market to deposit the renminbi that they receive from trade with China and will no longer need do so because they will be using their own banks," said Dariusz Kowalczyk, senior economist and strategist at Crédit Agricole.

"Taiwan would be a competitive centre, there might be some customers outside [the country] who might be interest in using Taiwan."

Raymond Yeung, senior economist at ANZ agrees: "If Taiwanese manufacturers find it more convenient to do more business with their local bank in Taiwan, then we might see this transfer of funds from Hong Kong to Taiwan," he said to Asiamoney PLUS in a telephone interview.

The plan envisages one branch of a Taiwanese bank in China and one branch of a mainland bank in Taiwan – rumoured to be Bank of China (Taiwan) – becoming designated clearance banks, according to Reuters.

Taiwan and China close to RMB deal

Taiwan’s central bank chief told legislators earlier this month that he hoped Taiwan and China could sign a deal in the near future on a clearing system for the renminbi.

Although this development might be viewed positively by the market, this new initiative is not anticipated to have an immediate and massive impact on the CNH market. Taiwan will not be the main cause of Hong Kong’s tightening onshore renminbi liquidity.

"The major driver squeezing liquidity in Hong Kong is China enterprises coming to borrow from Hong Kong’s financial institutions, rather than some of these deposits flying back from Hong Kong to Taiwan," added Yeung.

Nonetheless, Hong Kong and Taiwanese financial institutions will still be able to benefit from this new agreement as the pool of renminbi liquidity is expected to grow regardless of location.

"If Taiwan builds up their liquidity pool, then the interbank market between Hong Kong and Taiwan can also leverage with each other as well," said Candy Ho, head of renminbi business development for Asia Pacific at HSBC to Asiamoney PLUS. "I’d also like to think that if the pie gets bigger, everybody will benefit."

The Hong Kong Monetary Authority (HKMA) reported that CNH deposits slipped 2.1% in March to Rmb554.3 billion (US$88 billion), the fourth straight month of declines suggesting that onshore liquidity is continuing to tighten.

Crédit Agricole also anticipates that the tightening is partly due to the emergence of competing offshore renminbi centers – like London and Singapore – and is likely to lead to further increase in CNH money market rates, dim sum bond yields and CNH cross-currency swaps, weakening of the CNH in the forward market and strengthening in the foreign exchange spot market.

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