Hong Kong Takes Steps to Ensure Liquidity When MSCI Adds China

(Bloomberg) -- Hong Kong regulators are taking measures to ensure there will be enough offshore yuan available to investors when Chinese shares are added to MSCI Inc. benchmarks on June 1.

With an estimated $17 billion expected to flow into mainland bourses, much via links with Hong Kong’s stock market, the city’s de facto central bank is seeking to avoid a liquidity crunch. Among the steps, it’s asked participants not to hoard yuan and is encouraging firms with mainland operations to bring currency to the city, according to industry officials in the city briefed on the plans.

The Hong Kong Monetary Authority has been talking to banks about inclusion day for several months, an agency spokeswoman said by email. There is a yuan liquidity facility that can support the market if needed, and a 400 billion yuan ($63 billion) currency-swap arrangement with the People’s Bank of China, which can serve as a backstop, the spokeswoman said.

MSCI inclusion will see international funds head to China to buy the more than 200 mainland-listed stocks that will be added to global indexes. All the shares will be available through the stock connect trading link run by Hong Kong Exchanges & Clearing Ltd., and investors who plan to use the system will need to pass yuan to the bourse after the close for transfer to mainland China venues.

An anticipated surge in trading around inclusion day is expected to squeeze the yuan market in the former British colony as investors scramble for the currency to pay for shares. That may increase short-term borrowing rates and even leave investors without the money needed to settle trades. Hong Kong’s one-week yuan interbank deposit rate climbed to 4.5 percent last week, above its average for the past year.

Monetary Authority officials gave details of their plan at an April 16 meeting, according to Cindy Chen, head of securities services at Citi Hong Kong, a unit of Citigroup Inc., and Sally Wong, chief executive officer at the Hong Kong Investment Funds Association.

“A concern is investors or brokers will hoard yuan before inclusion,” said Chen. “There is clear guidance from HKMA to discourage anyone to pre-fund or get the yuan in advance of inclusion date as that would make the situation worse.”

The nine banks responsible for providing liquidity in the offshore yuan market have been told they should keep their credit lines with the HKMA clear for inclusion day, according to both Chen and Wong.

While a currency squeeze is on the minds of brokers and investors ahead of inclusion day, one potential hurdle has been resolved: the daily limits on buying through the connects. PBOC governor Yi Gang last month announced a fourfold increase in the stock link’s quota, which took effect on May 1.

--With assistance from Alfred Liu

To contact the reporter on this story: Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net.

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Richard Frost at rfrost4@bloomberg.net.

©2018 Bloomberg L.P.