A Chinese 100 renminbi (yuan) note is held up in front of the Pudong financial district skyline in Shanghai, 21 May 2007. China recently said that it will widen its currency's trading band and raise interest rates but major partners and analysts urged Beijing to go still further to help trim huge trade imbalances. The United States and Japan reacted promptly to the announcement, urging China to use the wider band to let the yuan trade more freely and to further increase flexibility on exchange rates. AFP PHOTO/Mark RALSTON

Offshore renminbi interest rates in Hong Kong have climbed to near record highs this week as banks compete for funds in preparation for the launch of a highly anticipated trading link that will grant investors there unprecedented access to China’s mainland equity market.

HSBC, Citigroup and Standard Chartered are among the banks that have raised interest rates on time deposits in recent days, following even more aggressive rate increases by the Hong Kong units of mainland lenders including Bank of China and Citic Bank.

Bank of China (Hong Kong) was offering rates of 3.13 per cent on one-year offshore renminbi (CNH) deposits on Thursday, its highest level in nearly two years and up from 2.52 per cent in early June, according to Thomson Reuters data. HSBC was offering a more modest 2.68 per cent rate for one-year deposits on Thursday, still its highest ever.

The rise in CNH rates has occurred even as onshore renminbi interest rates have fallen in recent weeks due to a series of cash injections by China’s central bank.

The one-year Shanghai interbank offered rate stood at 4.95 per cent on Thursday, down from 5 per cent in mid-September.

The Hong Kong-Shanghai stock connect, which will allow Hong Kong investors to invest in the Shanghai stock market without regulatory approval, did not launch in late October as expected. But exchange officials in both Hong Kong and Shanghai have said technical preparations are complete, and market participants still expect the programme to begin within weeks or months.

China maintains strict capital controls that prevent investors from exchanging foreign currency for renminbi without regulatory approval. But unlike China’s original scheme to allow foreign investors to access onshore capital markets – known as the Qualified Foreign Institutional Investor (QFII) programme – the stock connect scheme does not provide a mechanism for converting foreign currency into renminbi.

Instead, Hong Kong participants will source renminbi in the CNH market, which is unregulated but also segregated from the onshore renminbi (CNY) market. CNH deposits in Hong Kong reached Rmb944bn ($154bn) by the end of September, with cross-border renminbi trade settlement the main driver of CNH accumulation in banks in the territory.

CNH interest rates have traditionally lagged behind their onshore counterparts, as the relative lack of CNH assets left holders with few options to invest their cash, damping demand for the currency.

The growth of the renminbi QFII (RQFII) programme, which allows approved offshore investors to invest offshore renminbi in the onshore stock and bond markets, has increased demand somewhat. The rise of the offshore renminbi bond market – known as dim sum bonds – has also helped.

The impending launch of the stock connect, which is less restrictive than RQFII and offers a much broader range of assets than the dim sum market, is further boosting demand for CNH. That suggests onshore and offshore renminbi interest rates are on course for further convergence.

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