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13 Jan 2016
CNH funding squeeze – Nomura
FXStreet (Delhi) – Research Team at Nomura, notes that the surge in CNH funding costs has been severe, with the overnight CNH Hong Kong interbank offer rate fixing rising from 3.0% (5 January 2016) to as high as 66.8% (12 January 2016).
Key Quotes
“We believe the funding squeeze in CNH started when the authorities began to sell USD/CNH aggressively. This followed the offshore and onshore spot RMB intraday basis widening to as much as around +1800pips on 6 January 2016 – the widest level on record. In our view, the risk of intervention was high given rising depreciation expectations, risk of more capital flight, and broader negative financial market impacts.
Indeed, the PBoC’s ability to create a funding squeeze and use of this as a tool to reduce long USD/CNH positions have become marginally easier now that CNH liquidity conditions have become less ‘loose’ thanks to falling CNH deposits and rising CNH loans in recent months. CNH deposits in Hong Kong hit a recent peak around June 2015 and have fallen sharply by 14% (RMB139bn) to RMB854bn in October 2015. In the same period, CNH loans in Hong Kong have risen by RMB57bn, resulting in the CNH loan-to-deposit ratio rising from 23.8% in June 2015 to 34.4% in October 2015.
With cross-border capital flows now under greater scrutiny, the ability of banks in Hong Kong to obtain cheaper CNY funding onshore is severely reduced. In addition, there are signs that a few Hong Kong banks are willing to supply CNH liquidity in the interbank market, but at much higher yields (source: Reuters). While commercial banks can in theory access the HKMA’s intraday and overnight RMB repo facilities, we suspect some of them may have used up their quota which is determined by a set of eligible collateral such as HKMA Exchange Fund Bills and CNH CGB.”
Key Quotes
“We believe the funding squeeze in CNH started when the authorities began to sell USD/CNH aggressively. This followed the offshore and onshore spot RMB intraday basis widening to as much as around +1800pips on 6 January 2016 – the widest level on record. In our view, the risk of intervention was high given rising depreciation expectations, risk of more capital flight, and broader negative financial market impacts.
Indeed, the PBoC’s ability to create a funding squeeze and use of this as a tool to reduce long USD/CNH positions have become marginally easier now that CNH liquidity conditions have become less ‘loose’ thanks to falling CNH deposits and rising CNH loans in recent months. CNH deposits in Hong Kong hit a recent peak around June 2015 and have fallen sharply by 14% (RMB139bn) to RMB854bn in October 2015. In the same period, CNH loans in Hong Kong have risen by RMB57bn, resulting in the CNH loan-to-deposit ratio rising from 23.8% in June 2015 to 34.4% in October 2015.
With cross-border capital flows now under greater scrutiny, the ability of banks in Hong Kong to obtain cheaper CNY funding onshore is severely reduced. In addition, there are signs that a few Hong Kong banks are willing to supply CNH liquidity in the interbank market, but at much higher yields (source: Reuters). While commercial banks can in theory access the HKMA’s intraday and overnight RMB repo facilities, we suspect some of them may have used up their quota which is determined by a set of eligible collateral such as HKMA Exchange Fund Bills and CNH CGB.”