China and Hong Kong regulators have jointly released 11 measures to enhance Hong Kong’s Fixed Income and Currency (FIC) market (6 measures) and offshore RMB business (5 measures). These measures are designed to establish Hong Kong as the leading global offshore RMB centre and a key facilitator of RMB internationalisation.
These initiatives carry profound implications for the Hong Kong asset market, as well as for CNH and HKD rates. First, CNH liquidity is set to deepen. The HKMA is expanding its RMB Business Facility size from RMB200bn to RMB500bn. This expansion is expected to address the growing RMB funding needs in Hong Kong and in overseas markets, including ASEAN, where over 90% of the current quota has already been allocated. Concurrently, the SFC is supporting the inclusion of Northbound Bond Connect bonds as eligible margin collateral. This move will inject fresh liquidity into the market, especially given that non-cash collaterals currently constitute only 9% of total margin requirements. Coupled with the proposed 7-day CNH repo and new short-term debt instrument offerings, these measures substantially enhance the backstop for offshore RMB funding. Against this backdrop, offshore rates are expected to remain anchored.
Second, regulators are expanding product offerings to meet rising hedging needs. The Fixed Depository-Institutions Repo Rate (FDR007) will be added to the existing Swap Connect IRS options (FR007, 3M and O/N SHIBOR, and 1Y LPR). This will enable investors to hedge with a more accurate measure of bank liquidity and central bank policy effect than the traditional FR007. Other product offerings include 5Y China Government Bond futures.
Third, the expansion of Southbound Bond Connect is expected to increase demand for offshore bonds. The annual quota is being raised from RMB500bn to RMB800bn. More importantly, investors are encouraged to invest in HKD bonds through this scheme. The higher-yielding HKD fixed income products appear attractive to onshore investors. Notably, the 10Y CGB-HKGB spread has already widened to -260bps recently. This fresh demand from Mainland China is expected to slow the rising long-end yield and term-premium. Bond supply has been increasing alongside Hong Kong Government infrastructure development. Quasi-public sector issuance has also reached HKD62.1bn year-to-date, and foreign entities such as multilateral development banks are issuing more HKD instruments.
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