Hong Kong’s quarterly yuan conversion quota with the mainland may double to 8 billion yuan ($1.26 billion) this quarter after the existing limit was reached in the previous quarter, the Hong Kong Monetary Authority said on Monday.
The total position that needs to be squared through the clearing bank in the fourth quarter may increase compared with past few quarters, but the total net position will not exceed 8 billion yuan, the city’s de facto central bank said.
The quota was exhausted during the third quarter because there were more companies selling yuan to the city’s banks than there were buying the currency, the HKMA said on September 23. The yuan dropped to a six-month low of 6.56 per US dollar in offshore trading in Hong Kong that day, a record 1.9 percent discount to the prevailing onshore rate in Shanghai, according to data compiled by Bloomberg.
The yuan snapped a two-day loss on Monday in Hong Kongafter the HKMA’s announcement, trading 0.25 percent stronger at 6.4765 as of 4:27 pmlocal time. That’s 1.4 percent weaker than the onshore rate, which ended September 30 at 6.3859. The mainland’s financial markets are closed this week for the National Day holiday. The currency sank 2.1 percent in Hong Kongin September, more than the 0.12 percent loss in Shanghai, as Europe’s debt crisis bolstered demand for US dollars, a safe-haven play.
While the increased quota is unlikely to materially alter the weakness of the yuan traded in Hong Kong, it should calm unnerved investors who saw a sharp sell-off in the offshore yuan markets in the last two weeks.
“The quota expansion is a positive as it eases the pressure to sell yuan in the market,” said Chan Tak-cheung, head of currencies and interest-rate trading at Bank of East Asia Ltd in Hong Kong. “There’s still concern about Europe’s debt crisis and a slowdown in China’s economic growth. The impact of the new quota will be clearer when the mainland’s market reopens next week.”
Linan Liu, a senior strategist at Deutsche Bank, said the increased quota may not be enough to turn the market around but the additional liquidity will help provide reassurance to worried banks.
This is not the first time that the clearing authority’s quota has filled up. Authorities had increased limits last year too after heavy premiums commanded by the mainland currency in Hong Konghad led to a demand spike in offshore yuan, filling up the quota last October.
Since early this year, the People’s Bank of China has allotted a quarterly measure of 4 billion yuan to its Hong Kongbranch at the start of every quarter.
The amount of yuan-denominated trade settled in Hong Kongjumped 25 percent to 186 billion yuan in August from July, HKMA data show. The HKMA said on Monday it expects the currency to be used more widely in the city’s commerce after the central government expanded its yuan trade-settlement program from 20 provinces to nationwide.