Hong Kong Yuan Conversion Quota May Double in Fourth Quarter

Hong Kong’s quarterly yuan conversion quota with China may double to 8 billion yuan ($1.26 billion) this year after the existing limit was reached in the last three months, the city’s monetary authority said today in a statement.

The quota was exhausted during the July-September period because there were more companies selling yuan to the city’s banks than there were buying the currency, the Hong Kong Monetary Authority said in a separate statement on Sept. 23. The yuan dropped to a six-month low of 6.56 per dollar in offshore trading in Hong Kong that day, a record 1.9 percent discount to the prevailing onshore rate in Shanghai, according to data compiled by Bloomberg.

The yuan snapped a two-day loss today in Hong Kong after the HKMA’s announcement, trading 0.25 percent stronger at 6.4765 as of 4:27 p.m. local time. That’s 1.4 percent weaker than the onshore rate, which ended Sept. 30 at 6.3859. Mainland China’s financial markets are closed this week for the National Day holiday. The currency sank 2.1 percent in Hong Kong in September, more than the 0.12 percent loss in Shanghai, as Europe’s debt crisis bolstered demand for dollars.

“The quota expansion is a positive as it eases the pressure to sell yuan in the market,” said Chan Tak Cheung, head of currencies and interest-rate trading at Bank of East Asia Ltd. in Hong Kong. “There’s still concern about Europe’s debt crisis and a slowdown in China’s economic growth. The impact of the new quota will be clearer when China’s market reopens next week.”

Yuan Trade

The amount of yuan-denominated trade settled in Hong Kong jumped 25 percent to 186 billion yuan in August from the previous month, HKMA data show. The HKMA said today it expects the currency to be used more widely in the city’s commerce after China expanded the its yuan trade-settlement program from 20 provinces to nationwide.

“By providing a price closer to the onshore rate, the offshore market can be adjusted in tandem with the onshore market,” said Raymond Yeung, economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “In the medium term, the gap between onshore and offshore cannot be sustained with increasing cross-border trade flow.”

-- With assistance from Stephanie Tong, Sophie Leung and Marco Lui in Hong Kong. Editors: James Regan, Ven Ram

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