It thus has a long way to go but the challenges need to be addressed by the Chinese authorities now.
The key enhancements of the Hong Kong Liquidity Facility by the HKMA are expanding both intraday and overnight repos, improving operational flexibility by extending operating hours, reduce the repo rates of the overnight repos to benefit their clients also in other time zones.
Money market products have been provided by the PBoC in the form of central bank bills, but others such as CDs are issued by commercial banks.
As mainland bonds play an increasingly strategic and long-term role in global investors portfolios, the need to manage related interest rate risk, exchange rate risk and liquidity risk for their bond investment will be more prominent. For this purpose, ‘swap connect’ to trade interest swaps has been adopted.
At the core of this effort is the HKMA’s enhance programme to modernize the Central Money markets Union (CMU) into a major Important Central Securities Deposit (ICSD) in Asia.
Another main infrastructure is the renminbi clearing and settlement through the China Cross-Border Interbank Payment System (CIPS).
Banking supervision in many partner countries of China are certainly not up to international standards.
The first one is liquidity risk which has been discussed above. In addition to this, the current 40 swap lines between renminbi and other currencies should be extended.
The second one is inflationary risk in the domestic economy, as the amount of transactions between offshore renminbi banks cannot be controlled.
The third risk is the credit risk in the offshore renminbi market.
