Hong Kong’s offshore renminbi liquidity will reach one trillion renminbi by the end 2012 and 3.2 trillion renminbi by end 2015, according to HSBC’s new forecasts.

 

A year after the start of Hong Kong’s offshore renminbi (or CNH) market, the second 12-month period witnessed strong double digit growth rate almost every month as the initial 90 billion renminbi pool of CNH deposits grew rapidly.

 

In contrast, Hong Kong’s renminbi deposit base has fallen for six of the past 12 months, averaging a monthly growth rate of barely 0.1%, to stand at 557.7 billion renminbi at end June 2012. The turnaround stems from a rapid deceleration of global trade flows and a fundamental shift in the currency’s appreciation expectations.

 

HSBC’s Greater China economist Donna Kwok says that “CNH activity has flourished throughout the past year without a comparable expansion in Hong Kong’s deposit base, so we think sufficient liquidity has accumulated for the market to withstand temporary dips.”

 

Factoring in higher-yielding renminbi certificates of deposit (CDs), total liquidity has remained at 680-700 billion renminbi since February.

 

The CDs’ share of outstanding renminbi deposits in Hong Kong has more than doubled from 9% of the total a year ago to almost a quarter; one-year offshore renminbi CDs yields were 2-3% per annum over the first half of 2012 compared with an average annualized renminbi savings deposit rate (for amounts less than 100,000 renminbi) of 1% and over 95% of CDs have less than 12 months’ maturity.

 

Further, if CNH deposits outside Hong Kong are added, the outstanding base is at an all-time high of 789 billion renminbi, HSBC adds.

 

Such developments highlight flourishing CNH activity, alongside a jump in daily turnover in the CNH FX market to US$4 billion, on a par with the previously dominant CNY non-deliverable forward (NDF) market. At the same time, gross issuance in Hong Kong’s renminbi denominated (or dim sum) bonds and CDs continues to pick up pace and has already surpassed last year’s total (189 billion renminbi), reaching 196 billion renminbi by the end of July (42% of which was in bonds).

 

With the deceleration in global trade flows, the share of China’s total trade settled in renminbi has risen to a tenth from only 2% two years ago.

 

Kwok observes that “Hong Kong’s renminbi deposit base no longer captures total CNH liquidity” and “is no longer the best way to measure liquidity” although, as one of the few monthly measures of renminbi liquidity, it continues to be used as a key indicator of the market’s health. Further, it remains an important yardstick as CNH transactions would dwindle without sufficient liquidity.

  

The renminbi pool is expected to “eat away at the 50% share of total deposits currently dominated by non-renminbi foreign exchange (around two thirds of which has been denominated in USD since 2000)”, rising to 30% of total deposits in Hong Kong by 2015.

 

According to HSBC, a continued expansion in CNH liquidity will be underpinned by the resilience of renminbi trade settlement growth; the opening up of new and the expansion of old channels through China’s capital account, and the responsiveness of the HKMA (Hong Kong Monetary Authority) to dealing with the impact of external market turbulence on the CNH market.