Yuan interest rates in Hong Kong surged to a 17-month high as a cross-border stock trading program decreased the Chinese currency’s supply in the city.
The one-week interbank offered rate rose 62 basis points to 4.7 percent, while the one-month tenor climbed 24 basis points to 3.93 percent, according to Treasury Markets Association fixings. Both were the highest since June 28, 2013. The overnight rate jumped 104 basis points, or 1.04 percentage points, to a four-week high of 5.39 percent.
The Shanghai-Hong Kong link allows for daily cross-border transactions of a maximum 23.5 billion yuan ($3.8 billion). There have been more purchases of Shanghai stocks by global investors, or northbound flows, than by mainland investors buying Hong Kong shares. The Shanghai Composite Index rallied 14 percent over the past month through yesterday, beating all 92 of the world’s other benchmark equity indexes.
“As mainland equities rally, interest in northbound flows within the Shanghai-Hong Kong Stock Connect program is increasing,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in a research note to clients today. “As a result, net outflows of offshore yuan to the mainland are intensifying.”
International investors have bought a net 45 billion yuan of Shanghai shares since the link’s Nov. 17 debut, out of a limit of 300 billion yuan. Mainland investors purchased a net 4.2 billion yuan, from an aggregate quota of 250 billion yuan.
The total value of Chinese stocks traded climbed to a record 529.4 billion yuan today, data compiled by Bloomberg stretching back to 2005 showed, as the Shanghai Composite rose to a three-year high. About 30 percent of the 13 billion yuan northbound daily quota under the link was taken today, the most in eight days.
The yuan traded in Hong Kong climbed 0.08 percent to 6.1481 per dollar as of 5:33 p.m. local time, extending a three-day advance to 0.2 percent, according to data compiled by Bloomberg.
The expansion of a program that allows yuan raised offshore to be invested in China’s domestic capital market has further tightened yuan supply in Hong Kong, Kowalczyk said.
The world’s second-largest economy has extended the Renminbi Qualified Foreign Institutional Investor program beyond Hong Kong since 2013, with countries including the U.K., South Korea, Canada and Australia having 500 billion yuan in total quotas. Hong Kong has the world’s largest RQFII allocations of 270 billion yuan, all of which have been handed out to financial institutions.