HKMA prepares for greater yuan demand before stock connect scheme

(Adds details and comments) * HKMA to launch renminbi intra-day repos * Yuan daily conversion limit will be lifted * China to further facilitate foreign investments By Michelle Chen and Hongmei Zhao HONG KONG, Sept 15 (Reuters) - The Hong Kong Monetary Authority (HKMA) said on Monday it plans to launch a 10 billion yuan ($1.6 billion) intra-day repurchase facility to meet increasing demand for the Chinese currency when a landmark stock connect scheme kicks off in October. The city's de facto central bank is also seeking to lift the daily conversion limit for its residents, now capped at 20,000 yuan, to facilitate investments in China's domestic stock market. The stock-connect programme between Shanghai and Hong Kong - a big step in China's efforts to open up its markets - is widely expected to fuel more demand for yuan assets and market participants are racing to test mechanisms to ensure readiness. "We estimate demand for renminbi will be huge after the stock connect scheme, though it is difficult to quantify it. We've talked with banks and believe the 10 billion yuan repo quota should be enough," Norman Chan, chief executive of the Hong Kong Monetary Authority, said on the sidelines of a financial market summit. A list of five to six banks will be announced in the coming weeks to act as primary market liquidity providers and the HKMA will conduct repos with them, Chan added. Hong Kong's central bank has already started to offer overnight and one-day cash to banks involved in the offshore yuan trade since last July to safeguard against any cash tightness in the offshore market. Growth in yuan deposits in the former British colony lost steam in the past few months following a sharp weakening of the currency engineered by China's central bank to shake out hot money and prepare for further market reforms. As an indication of tighter offshore yuan liquidity, the one-year USD/CNH cross currency swap (CCS) has risen by 150 basis points (bps) in the past six months and is now hovering around more than one-year highs. China announced in April it would allow cross-border stock investment between Shanghai and Hong Kong. Northbound investment in mainland stocks would be limited to an overall quota of 300 billion yuan and a daily quota of 13 billion yuan. While non-residents can convert unlimited daily quantities of yuan since 2012, the conversion limit for residents still exists primarily because regulators wanted to prevent rampant currency speculation among residents, analysts said. "My colleagues have just communicated with the counterparts at the People's Bank of China, who said there would not be any problem to lift this limit. We are seeking to implement this arrangement before the stock connect scheme," said Chan. At the same summit, Xu Hao, deputy direct-general at the fund and intermediary supervision department of China Securities Regulatory Commission (CSRC), said Beijing would further facilitate foreign investment in China and enable connections with other markets. "We will relax restrictions on QFII and RQFII participants, streamline investment procedures and increase quotas for these investors," Xu said. QFII and RQFII are among the very few channels through which foreign investors can tap China's onshore market at present. China accelerated its pace to expand RQFII quotas to countries such as France, Germany and Luxemburg in the past few months. ($1 = 6.1417 Chinese yuan) (Reporting by Michelle Chen; Editing by Jacqueline Wong)