CNH Tracker-Fears of cash squeeze in yuan market ease as long holiday looms

By Michelle Chen

HONG KONG, Sept 26 (Reuters) - The offshore yuan market is

not expected to suffer a cash squeeze ahead of a long holiday in

China next week as banks have stocked up on cash, led by the

central bank's large fund injections into the financial system.

With memories of June's cash squeeze in onshore markets

still fresh in the minds of investors, banks in Hong Kong have

taken no chances this time around and yuan borrowing rates

remain low in the offshore market.

Hong Kong banks aggressively drew in yuan deposits even a

month before China's National Day holiday which stretches from

Oct (KOSDAQ: 039200.KQ - news) 1 to 7, with interest rates as high as 3.4 percent,

exceeding the onshore one-year benchmark rate of 3 percent.

Meanwhile, the Hong Kong Monetary Authority (HKMA) has

started to offer overnight and one-day cash to banks involved in

offshore yuan trade in July, a move that aimed to stabilise the

money market rates in case of a fund shortage.

The overnight lending rate in the so-called CNH (KOSDAQ: 023460.KQ - news) market stays

well below 1 percent on Thursday, much lower than the same

period last year when rates sought by some brokers briefly

jumped to a record 7 percent.

"A cash crunch is not likely this time. Overnight lending

rates may rise ahead of the holiday, but to 1.5 or 2 percent at

most," said Pinru Tan, a rates strategist at HSBC (LSE: HSBA.L - news) in Hong Kong.

In Tan's view, a fund injection by the People's Bank of

China (PBOC) in the onshore market this week will not only ease

any immediate cash tightness but will help manage Chinese banks'

expectations about market liquidity.

That would restrain them from drawing on Hong Kong's yuan

funds as was seen in June's money market crunch, which saw

onshore rates spike to as much as 30 percent at one point,

alarming global investors.

Onshore lenders drained liquidity from Hong Kong's 650

billion-plus yuan $106 billion deposit base via their overseas

subsidiaries to meet onshore funding needs in June when the PBOC

stepped back from supporting the markets.

The PBOC injected 88 billion yuan into onshore money market

on Tuesday through six-day reverse bond repurchase agreements,

its largest one-day injection since the week before the Spring

Festival holiday in February.

Signs that the world's second-largest economy is regaining

momentum and the yuan's recent outperformance of other emerging

market currencies also have prompted more global investors to

enter the yuan market, bringing in more liquidity.

WEEK IN REVIEW:

* Indonesia will sign a bilateral currency swap deal with

China worth at least $15 billion next month, an industry

ministry official said on Friday, a move aimed at bolstering the

ailing rupiah.

* China will officially launch on Sept 29 the Shanghai pilot

free trade zone, state news agency Xinhua said on Tuesday,

citing sources at the city government, but did not give further

details.

* Hang Seng Bank attaches great importance to its mainland

and cross-border business and is actively preparing to set up an

outlet in the Shanghai Free Trade Zone, said Rose Lee, the

bank's vice chairman.

* Taiwan's central bank is considering raising the 20,000

yuan ($3,300) daily limit that local individuals can buy in a

bid to tap the growing offshore yuan market, two sources with

close knowledge of the matter said on Tuesday.

CHART OF THE WEEK:

CNH overnight lending rate offered by brokers:LEAGUE TABLES

Book runner: Proceeds (RMB mln): # of issues:

1.HSBC 43,953.2 129

2.Standard Chartered (Other OTC: SCBFF - news) 20,284.9 64

3.BNP Paribas SA (Milan: BNP.MI - news) 19,936.8 63

4.DBS Group 3,991.2 12

5.ICBC 3,526.7 10

* Thomson Reuters data as of Sept 26.

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THOMSON REUTERS SPEED GUIDES