HONG KONG regulators are taking measures to ensure there will be enough offshore yuan available to investors when mainland shares are added to MSCI Inc. benchmarks June 1.

With an estimated US$17 billion expected to flow into mainland bourses, much via links with Hong Kong’s stock market, the Hong Kong Monetary Authority is seeking to avoid a liquidity crunch. Among the steps, it has asked participants not to hoard yuan and is encouraging firms with mainland operations to bring currency to the city, according to industry officials in the city briefed on the plans.

The Hong Kong Monetary Authority has been talking to banks about inclusion day for several months, an agency spokeswoman said.

There is a yuan liquidity facility that can support the market if needed, and a 400 billion yuan (US$63 billion) currency-swap arrangement with the People’s Bank of China, which can serve as a backstop, the spokeswoman said.

MSCI inclusion will see international funds head to the mainland to buy the more than 200 mainland-listed stocks that will be added to global indexes. All the shares will be available through the stock connect trading link run by Hong Kong Exchanges & Clearing Ltd., and investors who plan to use the system will need to pass yuan to the bourse after the close for transfer to mainland venues.

An anticipated surge in trading around inclusion day is expected to squeeze the yuan market in Hong Kong as investors scramble for the currency to pay for shares. That may increase short-term borrowing rates and even leave investors without the money needed to settle trades.

Hong Kong Monetary Authority officials gave details of their plan at an April 16 meeting, according to Cindy Chen, head of securities services at Citi Hong Kong, a unit of Citigroup Inc., and Sally Wong, chief executive officer at the Hong Kong Investment Funds Association.

“A concern is investors or brokers will hoard yuan before inclusion,” said Chen. “There is clear guidance from the Hong Kong Monetary Authority to discourage anyone to pre-fund or get the yuan in advance of inclusion date as that would make the situation worse.”

The nine banks responsible for providing liquidity in the offshore yuan market have been told they should keep their credit lines with the Hong Kong Monetary Authority clear for inclusion day, according to both Chen and Wong. (SD-Agencies)