The cost of borrowing yuan in Hong Kong posted a record two-day drop on speculation banks in the city have stepped up efforts to increase supply of the currency.
The overnight Hong Kong Interbank Offered Rate fell 254 basis points to 2.24 percent, according to a fixing by the Treasury Markets Association. That took its two-day decline to 609 basis points, the most in data going back to June 2013. The rate has averaged 3.25 percent over the past year.
Hong Kong’s yuan interbank rate jumped to a two-month high on Dec. 3 as the People’s Bank of China was said to have ordered a halt to borrowing from the mainland via bond repurchases. A surprise devaluation in August also promoted some investors to switch out of yuan assets and contributed to a decline in the amount of savings denominated in the currency in Hong Kong to the least in almost two years.
"Some banks have likely got some yuan supply from the HKMA’s repo facility as well as through other channels," said Terry Siu, treasurer at Wing Lung Bank Ltd. in Hong Kong. "That eased the yuan liquidity tightness and led to the slides we’ve seen in the interbank interest rates."
Recent usage of the city’s yuan liquidity facility, which totals 24 billion yuan ($3.7 billion), has been within the normal range, the Hong Kong Monetary Authority said in a statement on Monday without elaborating further.
The overnight yuan borrowing cost will probably range from 3 percent to 4 percent through year-end, unless there are further controls put on cross-border fund flows or the yuan weakens significantly, Wing Lung’s Siu said.
The one-week yuan interbank rate in Hong Kong dropped 116 basis points to 3.56 percent, following a 160 basis-point decline on Friday that was the biggest since August, according to the Treasury Markets Association fixing. The offshore yuan fell as much as 0.42 percent to a three-month low of 6.4731 a dollar.
In Shanghai, the seven-day repurchase rate, a gauge of interbank funding availability, was steady at 2.31 percent, according to a daily fixing from the National Interbank Funding Center. The yield on China’s sovereign notes due October 2025 fell one basis point to 3.04 percent, data from the National Interbank Funding Center show.