China/Hong Kong banks:Q&A,RRR for offshore RMB sitting onshore

We published a note on the reported potential impact of RRR coveringoffshore RMB sitting onshore today. Here are three typical questionson the mechanism and long-term impact and our take on them.

    Q1: How would this RRR on offshore RMB work?

    A1: Based on our understanding, this RRR covers offshore RMB sittingonshore, and the RMB deposits staying offshore are not covered. Regulatoryreserves will be collected from onshore representative banks (for RMBCross-Border Payments System [CIPS] users), or onshore parent banks (foroverseas offshore clearing bank channel users), or directly from BOCHK(2388 HK, Buy) and BOC (Macau) (for Hong Kong/Macau clearing bankchannel users) as they directly settle transactions with PBOC branches.

    Q2: How to quantify the impact, especially for Hong Kong banks?

    A2: As per the CEIC, as of end-2015, Hong Kong banks held RMB1trn inyuan, Singapore had RMB0.2trn and Taiwan another RMB0.3trn. If weassume 40% of RMB balances in HK, 80% in SG and Taiwan (excludingloans, bonds, CNH interbank placements and cash balances) to be put backonshore as interbank deposits, the RRR base would be RMB843bn.

    Applying a simple 17% RRR, the RMB liquidity locked onshore could beRMB143bn. However, this calculation is purely static, and if banks moved tochange their RMB liquidity allocation (e.g. adding offshore RMB loans, orCNH interbank placements), the impact could be changed accordingly.

    Two implications for Hong Kong banks, in our view, (a) offshore lending ratecould go up in the short term as the average cost of their RMB liquidity couldgo up under the new rule; and (b) banks may bring the onshore balancesoffshore gradually in future, which may stabilise offshore lending rate andother funding cost in the medium-to-long term.

    Q3: How is this going to affect the CNH market and RMB’sinternationalisation progress?

    A3: CNH overnight HIBOR was 1.78% p.a. today, further down from 2.10%as of the previous close