The People’s Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA) intend to launch a new “Swap Connect”. At the same time, PBoC upgrades currency swap with HKMA. The yuan received a bit of a boost but is still seen struggling to strengthen due to PBoC’s tight controls on capital flows, economists at Commerzbank report.

Divergent path for USD and CNY rates to keep USD/CNY well supported

“A new ‘Swap Connect’ will allow international investors to participate in the China onshore interest rate derivative market. PBoC also said it has upgraded the currency swap facility with Hong Kong to a permanent agreement and expanded it to CNY800 bn. The aims are to provide long-term liquidity support to the Hong Kong market, help stabilize market expectations, and importantly, promote the development of the offshore CNY market in Hong Kong.”

“We see the latest initiatives as another small and incremental step from China to promote the internationalization of CNY. It will aim to promote greater settlement of bilateral trade in CNY. However, it still has a long way to go for CNY to be an investment vehicle because of PBoC’s tight controls on capital flows.”

“The divergent path for USD and CNY rates is still likely to keep USD/CNY well supported for now.”