HKMA lifts the RMB20,000 daily conversion limit for domestic residents

Is it a positive regulatory change?.

The Hong Kong Monetary Authority has announced the removal of the daily conversion limit of RMB20,000 for domestic residents effective 17 November 2014.

According to a research note from HSBC Global Research, this was seen a likely step ahead of the Shanghai-Hong Kong Stock Connect going live on November 17 this year.

It also noted that this regulatory change is also a positive step for the broader growth of the offshore RMB FX market.

More specifically, there is room for the offshore RMB pool in Hong Kong to rise and a wider amount of offshore RMB investment products to be developed.

By extension, this should enhance offshore RMB FX turnover over time and support the RMB’s profile of becoming more of an investment currency.

Here's more from HSBC Global Research:

Today’s decision came after the HKMA's introduction of a RMB10bn intra-day liquidity facility effective 10 November 2014. Both, in our view, are aimed at facilitating the potential demand for RMB liquidity going into the start of the Shanghai-Hong Kong Stock Connect (SHKSC).

Considering the HKMA has publicly suggested for some time now that the daily RMB conversion limit should be removed, today’s outcome should not be a complete surprise.

The HKMA also announced that RMB conversions should now be conducted in the offshore CNH market, instead of in the onshore market through the RMB clearing bank.

The size of SHKSC is significant compared to the existing portfolio investment channels. For example, it took 12 years and three years for approved quotas of QFII and RQFII to grow to the current levels of USD64bn and RMB294bn, respectively. In contrast, SHKSC allows for a total quota of RMB300bn (Northbound) and RMB250bn (Southbound) right from the beginning.

Moreover, the SHKSC does not have the lock-in period and repatriation restrictions the existing schemes have, and it is also offered to a much broader audience (for example, individuals and hedge funds are allowed to participate in the onshore market, for the first time).

As a result, the launch of the SHKSC is likely to be accompanied with higher RMB FX turnover and funding demand.

From a longer-term perspective, the removal of the RMB daily conversion limit will support the RMB development in Hong Kong. The city remains the largest, in terms of RMB deposits, among all offshore RMB centers.

RMB deposits have room to grow, given the increasingly attractive level of implied yields in the CNH FX market.

USD-CNH points edged slightly lower following the HKMA’s regulatory change, as the market takes the measure as being more supportive for offshore RMB funding.

Nevertheless, the FX market is likely to stay relatively cautious ahead of SHKSC going live given the risk of one-sided Northbound flows initially, on top the upcoming RMB12bn Ministry of Finance CNH bond issuance next week that historically tends to tighten market liquidity.

The offshore RMB FX market is getting deeper and more sophisticated, reflecting the rapid widening of the offshore and onshore flow channels. The offshore RMB liquidity pool has steadily risen, to more than RMB2trn, as measured by bank deposits and CDs globally.

Offshore RMB daily FX transactions (spot and forward) have also risen to around USD30bn per day.

We believe the CNH FX market is deep enough to overcome the hurdles involved with rapid widening of the offshore and onshore flow channels, although some policy changes may be needed in future as the RMB becomes bigger. Today’s announcement is an important step in the right direction.