Hong Kong is scrapping a daily limit on the amount of yuan residents can buy, helping to reinforce its dominance as an offshore trading center for Chinese assets as Shanghai’s stock market opens to the territory’s investors.
The 20,000 yuan (US$3,260) conversion cap has existed since 2004, when Hong Kong became the first location outside of China to allow banks to accept yuan deposits. The end of the restriction puts locals on a par with non-residents, who have been able to buy unlimited amounts of China’s currency in the offshore market since August 2012. The change is scheduled to take effect on Monday next week, the same day the Shanghai stock link begins, Hong Kong Monetary Authority (HKMA) Chief Executive Norman Chan (陳德霖) said.
The restriction has been a hindrance for Hong Kong as cities including Singapore and London seek to become rival yuan centers. Outside of China, Hong Kong has the largest pool of yuan savings and is where most yuan-denominated bonds are traded.
“It’s definitely an important step in yuan internationalization,” DBS Group Holdings Ltd Hong Kong-based economist Nathan Chow (周洪禮) said. “Removing the cap will increase Hong Kong’s yuan holdings and fuel demand for yuan investment products.”
Shares of BOC Hong Kong Holdings Ltd, Hong Kong’s sole yuan clearing bank, rose as much as 4.9 percent after the HKMA announcement. The stock was trading up 4 percent at HK$27.40.
The change is set to cement Hong Kong’s status as an offshore yuan center, Hong Kong Chief Executive Leung Chun-ying (梁振英) said in a statement posted on a government Web site.
Hong Kong’s banks plan to execute residents’ yuan trades in the offshore market and transfers of the currency to onshore accounts are still going to be subject to China’s daily repatriation limit of 80,000 yuan per person, according to Chan. He said he did not see a need to amend the clearing agreement with the People’s Bank of China unless residents and the banking industry call for a change.
With the repatriation limit remaining, there is unlikely to be a significant impact on cross-border capital flows, Chow said.
The onshore yuan’s exchange rate would still be largely determined by China’s macroeconomic factors and policies, Australia & New Zealand Banking Group Ltd (ANZ) wrote in a note yesterday.
The yuan traded in Hong Kong maintained losses after the cap-removal announcement. The offshore spot rate fell 0.06 percent to 6.14 per US dollar as of 2:23pm local time, according to data compiled by Bloomberg. In Shanghai, the currency dropped 0.02 percent to 6.13.
Hong Kong’s yuan deposits grew to a record 959.9 billion yuan in April, from less than 1 billion yuan in February 2004, according to HKMA data. The holdings were 944.47 billion yuan at the end of September, still the world’s largest offshore pool of savings in the currency.
Hong Kong banks can provide a “full range” of yuan services including financing to personal customers with the scrapping of the conversion limit, the HKMA said in a letter to banks yesterday.
“The removal of residents’ daily conversion cap bodes well for Hong Kong’s renminbi business, including, but not limited to, the stock connect,” ANZ economists Louis Lam (林慕爾) and Raymond Yeung (楊宇霆) wrote in a note. “Hong Kong should see a richer product suite of yuan-denominated investment products targeting local individuals.”
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