The removal of the RMB conversion cap imposed on Hong Kong residents and the establishment of Bank of China’s Paris branch as the official RMB clearing bank are steps forward on the path of the Chinese currency’s internationalization process, says a report issued by the Australia and New Zealand Banking Group Limited (ANZ).
The Hong Kong Monetary Authority (HKMA) chief executive Norman Chan said that the People’s Bank of China (PBoC) "see no issues lifting Hong Kong’s resident daily conversion quota" when he commented on the measures to support the Shanghai-Hong Kong Stock Connect pilot program.
Separately, the PBoC has authorized Bank of China’s Paris branch to be the official RMB clearing bank in Paris, making it the third city that has an official clearing bank in the European time zone.
The lift on Hong Kong residents’ RMB conversion will encourage local residents to hold more RMB. With the existing cap, local residents see RMB as a less flexible option amongst different foreign currency deposits.
Meanwhile, banks will be able to design more retail products, including RMB-linked or other forms of cross-currency structured deposits, enriching the product suite of Hong Kong’s offshore RMB market.
While the increasing demand for individual RMB deposits may fuel appreciation pressure on the exchange rate, the removal of the cap will unlikely alter the exchange rate in the long run because it is still largely determined by the macroeconomic factors and policy action of China.
The RMB spot rate will still be anchored by the PBoC’s daily fixing and the spot and forward rates will be traded at discount or premium on RMB, adjusted for the interest rate parity condition.
However, banks may need to increase their RMB liquidity positions in view of this relaxation. As the offshore pool of RMB remains largely constrained in the short term, the RMB interest rate will face an upward pressure.
With the PBoC appointing more RMB clearing banks in the offshore market, including the latest one in Paris, Hong Kong’s RMB market will no longer monopolize the supply of RMB in the offshore market because other cities will have direct access to RMB via their own clearing banks.
Exporters and importers in Europe can invoice and settle their trade in RMB, although such practice is still at an embryonic stage, says the report. As the clearing banks will use onshore exchange rate as their reference rate for cross-border trade and investment settlements, this development will imply a convergence of offshore and onshore exchange rates.