The Hong Kong Monetary Authority (HKMA) will provide an intraday repo facility of up to 10 billion yuan (US$1.6 billion) to banks in Hong Kong to boost liquidity in the city's offshore renminbi (CNH) market. This is part of the city's preparation for the coming launch of the Shanghai-Hong Kong Stock Connect, announces HKMA chief executive Norman T.L. Chan at the Treasury Markets Summit 2014.

"We know that liquidity breeds further liquidity. Without ample market liquidity, it is hard for any financial centre to flourish or maintain a competitive edge," he says.

In June 2012, the HKMA launched a repo facility to provide one-week funds for banks in Hong Kong as a backstop to facilitate their liquidity management. However, the facility was for T+2 settlement and did not fully address the needs of the banks. To assist bank treasurers to better manage their liquidity, the HKMA shortened the settlement of the repo to T+1 in January 2013 and again to T+0 in July 2013, according to a HKMA statement.

The Bank of China Hong Kong is the renminbi clearing bank in the city, while the newly-announced additional measure will be provided to the participating banks through intraday overdraft. The HKMA will charge a fee, based on the actual time used during the day, for the use of the facility.

The other additional measure HKMA will implement as backstop facility to assist banks in Hong Kong in managing their renminbi liquidity is the designation of a number of banks active in the CNH market as primary liquidity providers (PLPs).

Banks that are designated as PLPs are committed to using and developing Hong Kong as the global platform for supporting their offshore renminbi businesses. They are also committed to expanding their market-making activities in the CNH market. In return, the HKMA will offer a repo line to each of the PLPs to facilitate more efficient liquidity management when they carry out market-making and other business activities in the CNH market. This bilateral repo line can be used by the PLPs as intraday or overnight liquidity management purposes.

The HKMA is now finalizing the list of PLPs and the necessary documentation. "We hope to be able to announce the list of PLPs very shortly," Chan notes.

"The plans announced by the HKMA today will be catalysts for the growth and development of renminbi financial markets in Hong Kong, and the currency's increasingly seamless integration with the global financial system more broadly," comments Anita Fung (冯婉眉), HSBC CEO, Hong Kong.

"Today's announcements come at a very good time when investors' anticipation for the Shanghai/Hong Kong Stock Connect is gradually building up. The much-anticipated removal of the renminbi daily conversion cap, when implemented, will foster renminbi product innovation and create additional demand for more renminbi denominated investment products. This year marks the fifth anniversary of the launch of the pilot scheme on the use of renminbi in cross-border trade transactions in the summer of 2009," she continues.

Hong Kong started the renminbi banking business back in 2004, but until 2009, the business was restricted to the development of personal accounts for Hong Kong residents and use of credit cards. The major milestone was clearly the start of offshore renminbi trade settlement and other businesses for corporates five years ago.

During the past five years, the offshore renminbi has experienced a significant growth in Hong Kong. In terms of deposits, including certificate of deposits (CDs), they have grown from around 90 billion yuan in end-June 2010 by nearly 12x to 1.1 trillion yuan now, which makes the city the largest offshore renminbi liquidity pool in the world.

In trade settlement, Hong Kong banks handled 2.9 trillion yuan in the first half of 2014, compared to the total amount of mainland's external trade settled in renminbi of 3.3 trillion yuan in the same period.

Hong Kong has also become the largest issuance hub of offshore renminbi bonds or dim sum bonds, with a total of 93 issuances in the first six months of this year, amounting to 130 billion yuan in value. The total amount of outstanding renminbi bonds issued in Hong Kong amounted to 380 billion yuan at end-June this year.

In addition, the forex and financial derivative markets for renminbi have grown steadily over these few years, which, according to SWIFT, have raised the Chinese currency from the 20th position of the most used payment currency to the 7th position lately. Most strikingly, the value of payments that go through Hong Kong's renminbi real time gross settlement system has registered a phenomenal growth, reaching an average of around 700 billion yuan each working day.