CHINA’S central bank announced a series of measures Friday to support cross-border fund flows, in an apparent effort to avoid a potential liquidity crunch in the offshore yuan market around June 1, when Chinese shares will be included in MSCI’s benchmark indexes.

The MSCI entry is expected to trigger a surge in foreign money flows into yuan-denominated A shares, largely via cross-border stock connect programs with Hong Kong, potentially boosting demand for the offshore yuan.

The People’s Bank of China said in a statement that banks involved in offshore yuan clearing and settlement can tap liquidity from the onshore market, while urging clearing banks to come up with contingency plans to deal with liquidity risks.

The Hong Kong Monetary Authority (HKMA) welcomed the moves by the People’s Bank of China.

“As yuan internationalization continues to progress and mutual access of capital markets between the two places further deepens, market demand for offshore yuan liquidity will increase,” HKMA Chief Executive Norman Chan said in a statement.

Earlier last week, MSCI, the world’s leading index publisher, said it would include 234 mainland large cap stocks in its flagship emerging market index, with a partial inclusion factor of 5 percent initially. The inclusion will be completed in a two-stage process, in June and September.

The HKMA has been preparing for months to make sure there’s enough liquidity in the offshore yuan market around inclusion days, which some expect can draw US$17 billion of foreign inflows.

But some brokerages are still concerned they may not have access to adequate yuan liquidity to meet clients’ needs.

The People’s Bank of China said Friday that offshore yuan business clearing banks and participating banks would be permitted to conduct interbank market borrowing and bond repos in the mainland market.

Tapping onshore liquidity would help them develop their offshore yuan business, as well as duly implement the People’s Bank of China’s bilateral currency swap agreements, which serve as a backstop.

Meanwhile, the required reserve ratio of the yuan deposits placed by Hong Kong’s yuan business clearing bank in the settlement account in the Shenzhen sub-branch of the People’s Bank of China is cut to zero percent, thus freeing up more liquidity. (SD-Agencies)