The HKMA has relaxed the existing 20% NOP restriction, with banks now able to set their own NOP limit, subject to approval from the authority. In July, the rules regarding the NOP were relaxed for the first time, allowing the exclusion of investment positions under the Qualified Foreign Institutional Investor regime and RMB bond-market activities, while also allowing inclusion of net RMB deliverable forward (DF) positions to the calculation of the NOP.
In January, the NOP limit was increased from 10% to 20%, which traders say caused the one-year CNH DF curve to drop more than 300 points in two weeks.
The latest move is expected to create more liquidity in Hong Kong’s offshore renminbi market, as banks will have greater freedom to manage their RMB assets and liabilities.
“Though NOP limits will vary from bank to bank, in general it is a positive move that will improve the banking sector’s CNH liquidity and reduce the cost of RMB funds in the offshore market,” says Li-Gang Liu, chief economist at ANZ in Hong Kong.
“The DF market is expected to react accordingly, and swap points are likely to drop in the long end.”
With RMB deposits in Hong Kong continuing to contract, the rule change might prove timely, as offshore RMB bond issuances in the pipeline might reduce market liquidity.
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| Source: ANZ |