CNH Tracker-Hong Kong seeks policy boost for yuan business

By Michelle Chen

HONG KONG, Nov 21 (Reuters) - As China's sweeping plans for

economic reform over the next decade underline a leading role

for Shanghai in opening up the capital account, Hong Kong is

hurrying to shore up its own position as the premier offshore

yuan hub.

In addition to introducing a slew of diversified

yuan-related financial products in the past few weeks, market

participants on Monday made written proposals for policy changes

aimed at keeping the former British colony's edge intact.

The proposed changes would remove bottlenecks to growth in

Hong Kong's yuan liquidity pool, and help sustain its first

mover advantage in burgeoning offshore yuan business.

The Financial Services Development Council (FSDC), an

advisory body set up by the Hong Kong government, identified

various ways to promote the city's offshore yuan business to

ward off competition from other centres.

The wide-ranging suggestions include relaxation of daily

conversion and remittance limit for Hong Kong residents,

obtaining liquidity from the onshore market and a QDII3

programme that allows financial institutions registered in

Qianhai to make offshore investments.

"I believe most of these proposals can be approved and

rolled out within the next 12 months, some of which will be in

the form of pilot programmes," said Banny Lam, co-head of

research at Agricultural Bank of China International.

In Lam's view, Hong Kong may lose some business as Shanghai

begins to tap offshore yuan business, yet it can also explore

more opportunities as Beijing opens domestic markets faster.

Growth for Hong Kong's yuan deposits slowed from a tenfold

increase from early 2009 to Nov 2011, owing to slower yuan

appreciation, China's weak trade environment as well as a daily

conversion quota imposed on Hong Kong residents.

As a proportion of the total renminbi, as the yuan is also

known, in the offshore markets, the pool in Hong Kong had shrunk

to around 65 percent in September from more than 85 percent at

the end of 2011, according to the FSDC.

"Naturally, we expect more competition for offshore renminbi

business from financial centres around the world. Hong Kong has

always welcomed competition as a driver for growth and

progress," Hong Kong Chief Executive Leung Chun-ying said at a

forum on Wednesday.

Some analysts believe it is wise for Hong Kong to make the

most of Qianhai, given free currency movements will be tested

there while a free trade zone encompassing the small area is

expected to be approved soon.

Official approval for Guangdong province to set up a free

trade zone is expected quite soon, Chinese newspaper National

Business Daily reported on Monday.

"The proposal to utilise Qianhai is in the right direction,"

said Raymond Yeung, an analyst at ANZ.

The QDII3 proposal could lure many onshore financial

institutions to Qianhai to enable cross-border financial

investment in Hong Kong, Yeung said.

China is stepping up efforts to reform the onshore financial

market.

In comments contained in a public guide book to the

Communist Party's reforms, the People's Bank of China (HKSE: 3988-OL.HK - news) (PBOC)

Governor Zhou Xiaochuan said the central bank would move toward

allowing the yuan's exchange rate to trade freely, by gradually

expanding the trading band. He went on to say the PBOC would

"basically" exit from regular currency market intervention,

going slightly further than in previous comments which said it

would reduce intervention.

Offshore yuan reserves will have to reach 11 trillion yuan

to achieve one-third of the U.S. dollar's international status

within 15 years, the Financial Services Development Council

said.

WEEK IN REVIEW:

* GF International announced on Monday to launch a bond fund

under Renminbi Qualified Foreign Institutional Investor (RQFII)

scheme. The fund with a quota of 800 million yuan ($131.3

million) will invest at least 70 percent in government bonds or

those that have a credit rating of AA or above.

* CIFM Asset Management (Hong Kong) said on Monday to launch

a yuan diversified income fund under RQFII programme, which will

invest no more than 20 percent in China's A-share market and no

less than 80 percent in the onshore bond market.

* Industrial and Commercial Bank of China Singapore priced a

2 billion yuan two-year bond at 3.20 percent on Tuesday, the

tight end of the final guidance, thanks to an order book of over

5.2 billion yuan involving 100 accounts, according to IFR, a

Thomson Reuters (Frankfurt: TOC.F - news) publication.

* The spot offshore yuan hit a record high of

6.0573 on Tuesday, leaving the spread between the offshore and

the onshore yuan at more than 300 pips, nearing a 2013 high of

nearly 400 pips in early January.

CHART OF THE WEEK:

RMB in Hong Kong as a proportion of the total RMB in the

offshore market declines:RECENT STORIES:

CNH Tracker-Dim sum bond yields face upward pressure amid heavy

supply

More stories about the CNH (KOSDAQ: 023460.KQ - news) market

Daily onshore yuan reports

Daily China money market reports

Offshore yuan rate Onshore yuan rate

Offshore yuan dealt Onshore yuan on CFETS

THOMSON REUTERS SPEED GUIDES