BOCHK is best geared to positive CNH developments

Thanks to HKMA easing restrictions on offshore RMB.

According to Barclays, the HKMA announced on Thursday that the Net Open Position and Liquidity Ratio restrictions on offshore RMB will be removed as the CNH market begins to mature.

Here's more from Barclays:

We believe this provides more flexibility to banks to manage CNH liquidity and forex risk and should ultimately lead to better CNH asset deployment, in our view.

In addition, a CNH HIBOR Fixing rate will be introduced in June, allowing more market transparency and be used as a reference rate to price CNH loans and financial products. We believe BOCHK is best geared to positive CNH developments as the largest CNH deposit taker and sole clearing bank in Hong Kong.

What’s new?: On Thursday, the HKMA eased restrictions on offshore RMB (CNH) in Hong Kong, by removing the Net Open Position (NOP) limit and the 25% Liquidity Ratio on CNH, giving equal treatment to CNH as with other currencies in respect of liquidity and FX risk management. Moreover, the Treasury Markets Association (TMA) will be launching a CNH HIBOR Fixing rate in June.

Impact is more flexibility for banks to manage liquidity and FX risk: We believe the gradual deregulation reflects the progress of CNH development. Removing the NOP and Liquidity Ratio limits on CNH provides more flexibility for banks and ultimately leads to better CNH asset deployment, in our view.

Banks can now manage liquidity and FX risk on a total portfolio basis, rather than singling out CNH. Meanwhile, the introduction of a CNH HIBOR Fixing rate should provide more transparency to help manage interest rate risk and be used as a reference rate for pricing of CNH assets and liabilities.

Background: During the early stages of CNH development when the CNH market was small and illiquid, more stringent regulations were initially introduced by the HKMA to prevent any market disruption.

The NOP limit restricts banks exposure to RMB exchange rate risk while the liquidity ratio that requires banks to maintain 25% of RMB-denominated liquid assets ensured that banks can meet liquidity needs.

As the breadth and depth of offshore RMB (CNH) FX and money markets grew and transaction volume stabilised, the HKMA believes that these measures are no longer required. With the removal of the RMB net open position limit and RMB liquidity ratio requirement, CNH is now treated equally to other currencies in respect of liquidity and FX risk management.

In 1Q13, system RMB deposits (including CDs) reached Rmb810bn, while RMB trade settlements reached Rmb830bn, both a record high.