The recent depreciation of the renminbi has brought heavy pressure on the mainland's enterprises, banks and Hong Kong financial institutions involved in "cross-border shadow banking," but the proposed Shanghai-Hong Kong Stock Exchanges Connectivity Mechanism (SHSECM) will create new opportunities, reports the Guangzhou-based Southern Weekly.
On April 10, the central government and Hong Kong regulators jointly announced they will introduce the SHSECM within six months, seen as a real step to further open up the capital markets of the mainland and special administrative region.
In an initial test run, the regulators will conduct quota management, giving a daily quota of 300 billion yuan (US$48.1 billion) for Shanghai stocks, and 250 billion yuan (US$40.1 billion) for Hong Kong stocks, with a cross-border stock investment total of 550 billion yuan (US$88.2 billion).
The introduction of the mechanism marks a faster step toward the internationalization of the renminbi, and the Hong Kong financial market is transforming into the bridgehead for the process, the paper said.
Over the past few years, the US dollar depreciation triggered by the Federal Reserve's loose monetary policy has lead to record amounts of international capital flowing into Hong Kong, which is continuously seeking investment and arbitrage opportunities amid the appreciation of the renminbi and asset prices. However, the recent renminbi depreciation highlighted that much of capital actually came from domestic sources.
The Hong Kong regulator has been debating whether the cross-border financing, reaching as much as hundreds of billions of US dollars, is "hot money" for arbitrage or "normal credit financing."
Meanwhile, the renminbi has depreciated some 2.5% against the US dollar so far this year, the biggest fall in 20 years. On April 10, the official figures showed that China's March exports fell 6.6% from the same period a year earlier, while imports dropped 11.3%, the newest evidence of a weakening Chinese economy.
Following the rare depreciation of the renminbi, explosion of some payment defaults in the market, and tightening credit financing by some financial institutions, investors have also been withdrawing their funds from China.
According to the Wall Street Journal, 14 asset management companies managing more than half of the qualified foreign institutional investors (QFII) saw their assets shrink by 5.3 billion yuan (US$849 billion), or 14%, of their total asset value in March. Separately, in the first 20 days of March, investors withdrew US$1.1 billion from China's corporate bond funds.
Observers said that large amounts of "hot money" are flowing out of China, forcing the central bank to increase its purchasing foreign exchanges and thus tighten domestic credit financing. This forms a vicious cycle of tightening credit financing plus renminbi depreciation.
Daiwa Capital Markets expects the renminbi to depreciate by a further 10% against the US dollar, which would possibly trigger some systemic risks of the Chinese financial institutions. The Hong Kong regulator disagreed however, saying there is no major problem as among the city's cross-border debts of US$430 billion last year, US$320 billion belonged to interbank credit financing and shouldn't be seen as hot money.
