Recently, there is growing interest in RMB Deposits or Bonds. Investor should pay attention to this new market development but remain cautious and vigilant. if in doubt, please contact your financial adviser.

Last week, the market was caught off guard by the People’s of China’s (PBOC) lowering of the offshore RMB (CNH) deposit rate in Hong Kong to 0.72% from 0.99%, effective from 1 April.

Previously, banks in Hong Kong were constrained by their credit limits in placing deposits with Bank of China, which is the sole CNH clearing bank. As a result, banks have been buyers of bank papers even at yields lower than deposit rates of ~0.8%. Under the new policy, lenders involved in CNH settlement in Hong Kong are allowed to deposit the currency in a special account with China’s central bank, which means banks will face PBOC directly.

In the short term, we expect the move to result in short-dated bond yields correcting up toward the deposit rate, which will be generally positive for CNH bonds, except for bonds that are currently trading below the deposit rate.