The quantity of offshore renminbi (CNH) deposits in Hong Kong has risen to new highs. This is partly due to easier liquidity conditions in mainland China and partly due to the general strength of renminbi.
Offshore renminbi (CNH) deposits in Hong Kong rose to record high levels during August. This is partly the result of easier liquidity conditions in the mainland. It may well also be due to the People’s Bank of China’s new policy, which seeks strength, or at least stability, in renminbi vis-à-vis the US dollar.
The latest data shows that offshore renminbi (CNH) deposits in Hong Kong have been falling, as protagonists have repatriated funds to the mainland, where M2 growth has been slowing. Liquidity is likely to remain constrained in CNH markets in coming weeks.
Renminbi has remained firm relative to the US dollar this year, and reached new highs towards the end of last week. Market participants indicate that they now expect the currency to weaken somewhat – which appears also to be what the People’s Bank of China would like. We agree with the currency bears. While it is not inconceivable that renminbi achieves new record highs vis-à-vis the US dollar in coming weeks, we think that it is more likely that the currency loses ground.
Interbank interest rates fell on Monday, signalling an easing in the liquidity crunch that hit China’s financial system last week (Update Alert, June 18). We do not think, however, that Beijing is likely permit a return to the easy money environment that prevailed before June 13. More likely is that the People’s Bank of China (PBoC) has embarked upon a new, risky phase in its liquidity management characterised by warning banks away from shadow finance excesses while trying to safeguard flows of credit to the “real” economy.
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