The Central Bank of Hong Kong has stepped in to settle trade-related yuan transactions after the sole lender authorised to clear such trades with the mainland ran out of its quota for the year.
The HKMA said it had activated its 200 billion yuan currency swap line with China's central bank to clear currency transactions tied to exports and imports after the Bank of China (Hong Kong), the only bank designated to clear those trades, suddenly used up its 8 billion yuan quota. It is not know how much of the swap line was used on Friday.
The announcement caught traders and market players off guard in Hong Kong's fledgling yuan market, where trade has taken off in the past few months since China and Hong Kong widened the trade settlement scheme in July and allowed investors broader access to the yuan.
Analysts said the move may temporarily slow growth in the Hong Kong's yuan market, which China is using as a test bed to slowly internationalise its currency even while maintaining its strict capital controls that prevent most foreign investors from going onshore.
"Participating authorised institutions should accord priority to trade transactions that are due for immediate settlement," said Arthur Yuen, deputy chief executive at the HKMA.
Currency traders said the Bank of China HK reaching its quota likely meant that some of the settlements were not trade-related, showing the huge hunger among foreign investors to get a hold of the yuan in the Hong Kong market. However, the yuan may become harder to get for investors in the Hong Kong market in the near-term.
Analysts, however said, two of the more likely options to prevent a larger squeeze could involve Beijing giving the Bank of China HK a new temporary quota or further use of the Hong Kong-China swap line. China has facing heavy criticism for keeping its currency artificially weak and is trying to fight back against "hot money" coming into its onshore markets.
On Thursday, China's foreign exchange regulator said it had uncovered fradulent trades worth $7.34 billion in "hot money" flows this year. This week the central bank appeared to push the yuan lower to fend off any speculative funds coming in after last week's interest rate hike.
Yuan deposits and trade has surged in Hong Kong after a landmark July agreement permitting broader yuan investment and trade settlement. As of September, yuan deposits in Hong Kong were up 15 percent from a month earlier at a cumulative 149.3 billion yuan. HSBC said in a note that busting the limits represent a widening gap between institutional yuan demand and actual yuan trade settlement volumes, fuelled by huge demand to hold the yuan on expectations of further appreciation.
"If non-trade pressures were the primary reason for the earlier than expected quota expiry, then Beijing will use this as a means to impose supply constraints on institutional demand for the yuan that does not conform with its longer-term plans for internationalising the currency," HSBC said. Analysts said the limits to yuan supply in Hong Kong likely meant the spot rate in Hong Kong would rise even more against the dollar compared with onshore rates.
The huge hunger for yuan among international investors in the limited Hong Kong market has created a discrepancy between the two rates, with the yuan commanding a slight premium in Hong Kong over mainland rates.