Hong Kong companies have already exhausted their full-year quota of yuan to settle trades, underscoring the rush by companies and investors in the territory for the mainland currency on expectations it will keep rising.
The Hong Kong Monetary Authority said the full-year 8 billion-yuan quota has run out, prompting the de facto central bank to draw on a currency-swap arrangement it has with China's central bank for yuan to meet local companies' funding needs. At current rates, the quota totals about US$1.2 billion worth of yuan.
Part of the reason the quota was depleted early, traders and analysts say, is that speculators appear to be using the trade-settlement system—meant to help expand the international use of the tightly controlled mainland currency—to get cheaper access to yuan to bet on further appreciation.
The HKMA warned banks in a statement late Thursday to "exercise caution to guard against nonpersonal business conversions disguised as transactions for personal use." The conversion limit for individuals, 20,000 yuan a day, remains unchanged.
"There seems to be a widening gap between institutional demand for the yuan and actual yuan trade-settlement volumes, fueled by rising expectations for the yuan's appreciation," HSBC said in a report Friday.
"If this shortage proves to be trade-driven, we expect Beijing to widen the quota," the bank said. Otherwise, after any "unqualified use of the yuan trade settlement system has been identified and stamped out, we expect Beijing to forge ahead with its longer-term strategy for internationalization of the yuan."
China loosened the yuan's two-year peg to the U.S. dollar in mid-June; since then the Chinese currency is up 2.3% against the U.S. currency. The offshore forwards market is pricing in a further 3.4% rise over the coming 12 months.
Trade-settlement rates for yuan in Hong Kong are based on Shanghai domestic rates, which are cheaper than the offshore Hong Kong rates.
Despite Hong Kong's yuan grab, traders don't expect the depletion of the quota to have a major impact on the yuan market in Hong Kong, which is establishing itself as the foremost offshore center for the mainland currency. The territory has in recent years been expanding the scope of yuan-based business. Traders predict the HKMA will seek a larger trade-settlement quota for 2011.
Under the quota system, a Hong Kong company needing yuan to settle trades with a counterpart in mainland China asks its bank to obtain yuan via Hong Kong's only yuan-clearing bank, BOC (Hong Kong) Ltd. With the quota depleted, those funds will now be drawn from the 200 billion yuan swap arrangement that Hong King signed with the People's Bank of China in January 2009 to provide short-term liquidity to banks.
HKMA Deputy Chief Executive Peter Pang said the central bank plans to draw 10 billion yuan through the arrangement to meet demand, while banks can also use yuan they already hold or buy from the Hong Kong interbank market.
Soaring demand for yuan trade settlement comes as Beijing aims to boost the circulation of the yuan offshore by encouraging firms to use it to settle cross-border trades.
Beijing and Hong Kong signed an agreement July 19 that further relaxed yuan trading restrictions in Hong Kong. Under the revised rules, local banks can sell yuan-denominated insurance, securities and fund products in the territory. Restrictions were lifted on transferring yuan between accounts or between Hong Kong banks.
The new rules helped fuel a booming market for yuan debt outside mainland China.
Several banks have issued offshore yuan bonds in Hong Kong, and other entities have begun following suit. The Asian Development Bank last week sold 1.2 billion yuan in yuan-denominated bonds, more than it initially targeted, after the offering met strong demand from investors. The World Bank's financing arm, International Finance Corp., also plans to sell yuan bonds in the city.