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Jeanny Yu

Beijing will open up the onshore currency market to select foreign institutions, in a move that could threaten Hong Kong's status as an offshore yuan hub by eliminating the distinction between the two markets.
"Eligible" foreign institutions would be allowed to trade yuan on the mainland while onshore yuan trading hours, which run from 9:30am to 5:30pm every business day, would be extended, said Zhang Xiaohui, the head of the monetary policy department at the People's Bank of China. Market players see the move as a step in the direction of ending the one currency, two rates system.
China, because of its capital controls, is the only nation with different onshore and offshore currency rates.
Onshore yuan, denoted as CNY, was trading against the US dollar at 648 basis points stronger than the offshore yuan, or CNH, yesterday.
Onshore yuan has lost 3.2 per cent while offshore yuan has shed 3.7 per cent since Beijing jolted the markets with a shock devaluation on Tuesday.
The yuan fell for the third day in a row but the pace of decline seemed to be slowing as foreign exchange players adjust to the new, market-oriented currency mechanism.
"Once the market volatility is over, I would expect this gap between CNH and CNY to narrow," said Credit Suisse analyst Koonhow Heng.
As the two markets and rates converge, it could spell the end for arbitrage trading, a key revenue driver for offshore banks' yuan business. That may affect offshore yuan hubs like Hong Kong, said analysts.
"The offshore yuan deposit pool in Hong Kong has built up partly due to expectations of onshore yuan appreciation. Given that this is no longer the case, the deposit pool in Hong Kong is likely to decline," said Roy Teo, a foreign exchange strategist at ABN Amro.
Foreign investors have been barred from trading currency on the mainland.
Offshore yuan trading started in 2010, allowing most of the yuan trading to take place in Hong Kong, London and Singapore.
A convergence of the two markets would eliminate the need to park yuan in Hong Kong.
But Teo said: "We are not bearish on the CNH deposit pool as CNY usage or demand will only grow in the long term and hence, after the dust has settled, it should stabilise before building up again."
Eddie Cheung, a foreign exchange strategist at Standard Chartered, was equally upbeat on Hong Kong.
"Hong Kong does not purely rely on foreign exchange trading as an offshore yuan hub. There are many other aspects in Hong Kong's favour. It is not a zero-sum game as the whole pie is going to grow," Cheung said.
According to Teo, a convergence of rates, if at all, was not likely soon.
He believed CNH would remain at a discount to CNY well into the third quarter before narrowing in the fourth quarter.
"The [forex] regime reform does not mean the offshore and onshore markets will instantly become one," said Frances Cheung, the head of rates strategy, Asia-Pacific, at Societe Generale. "There are still restrictions for foreign investors to access the onshore market. Hence there is incentive for investors to accumulate offshore [yuan] fixed-income assets, including deposits."
 


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A shadow of a man is reflected on a glass showing the yuan and the People's Bank of China building in the background as Beijing said it could possibly open onshore trading in the currency to foreign institutions. Photo: AP

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