Frances Cheung, senior strategist Asia ex-Japan, Credit Agricole CIB:

The severe liquidity squeeze left longer-end rates less affected. In addition, the squeeze proved short-lived. It should not cause much concern over the funding situation for corporations, when the dim sum bond market continues to develop and banks and regulators are looking into exploring CNH loan business.

The liquidity squeeze could have been due to the end-of-quarter effect, and the offshore Chinese Government Bond issuance – which was oversubscribed by 3.79 times for the institutional investor tranche – soaking up CNH supply. As we pass the half-year, and the [unplaced] money has been returned from the bond issuance, the market has turned back to normal.

It is a bit ironic shortly after the Hong Kong Monetary Authority relaxed liquidity constraints on banks regarding renminbi positions, and started to provide renminbi facility that the market faced a severe squeeze.

Why hasn’t the HKMA facility been helpful? Market participants might have been hesitating in going for HKMA money, as they saw the squeeze as short-lived. Participants did not want to lock in seven-day money which appears to be benchmarked against an onshore rate and will only be delivered on a T+2 basis. Asking for HKMA’s help last Wednesday, you would have ended up getting the seven-day money only on Friday [July 6], probably at a rate of 4%, when the market was trading at below 3%.

He Weisheng, Asia FX and rates strategist, Citi:  
 
The gradual relaxation of the cross-border renminbi flows have led to a convergence of the renminbi liquidity onshore and CNH liquidity in Hong Kong. Hence, the recent liquidity tightness of the CNH market is largely a result of the still-tight funding conditions in the onshore market.

The lack of liquidity and depth of the CNH market means this tightness could be exaggerated from time to time. This has happened before and should not be a big concern for corporations. The long-term funding rates are still fairly stable. So far we have not heard any bank tapping the new HKMA seven-day liquidity facility but in any case, the availability of such a facility means the liquidity squeeze should not get too challenging. We think the CNH liquidity condition will be dependent on the People’s Bank of China RRR and reverse repo policy going forward.