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China, Hong Kong Expand Currency-Swap Pact to $63 Billion

Nov. 22 (Bloomberg) -- China’s central bank and the Hong Kong Monetary Authority expanded their three-year currency-swap agreement to 400 billion yuan ($63 billion), to bolster Hong Kong’s development as an offshore yuan center.

The agreement will allow Hong Kong access to yuan from the People’s Bank of China for three years, replacing another one of 200 billion yuan signed in January 2009, according to the statement on the PBOC’s website.

Demand for the Chinese currency in Hong Kong is rising and may lead to tighter liquidity in the city, HKMA Chief Executive Norman Chan said today. Hong Kong’s de facto central bank had to tap its swap agreement with the PBOC in October last year after demand for trade settlement in yuan exceeded expectations. Cross-border trade settled in the currency through Hong Kong rose to more than 1.3 trillion yuan in January through September, according to the HKMA.

“I’m seeing a trend that more and more overseas banks are using Hong Kong banks to serve their clients’ yuan service demands,” Chan told reporters in Beijing. “I expect that there will be big changes in the yuan investment channels in the next one to two years.”

The renewal of the agreement “is crucial in helping us to provide liquidity, when necessary, to maintain the stability of the offshore renminbi market in Hong Kong,” Chan said in a release on the central bank’s website today, referring to the yuan by its official name.

Frances Cheung, a senior strategist at Credit Agricole CIB, wrote in a research note that the swap will allow the HKMA to offer banks yuan and also expand the portion of its reserves invested in the currency in onshore markets as it diversifies from the dollar.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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