The cost of borrowing yuan in Hong Kong jumped to a record amid rising year-end demand for funds at a time when supply of the Chinese currency is shrinking.
The overnight Hong Kong Interbank Offered Rate surged 304 basis points to 9.45 percent on Wednesday, the highest since the Treasury Markets Association started compiling fixings in June 2013. That’s also the biggest one-day increase in almost three months.
“It’s a seasonal factor in play as we are heading into the year-end and demand for cash is rising,” said Terry Siu, treasurer at Wing Lung Bank Ltd. in Hong Kong. “That happens as Hong Kong’s yuan pool is getting smaller and investors remain bearish on the currency outlook.”
Hong Kong’s yuan interbank rates have been at higher-than-average levels since mid-November after the People’s Bank of China was said to have ordered a halt on borrowing from the mainland via bond repurchases. A surprise devaluation in August also prompted 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.
The city’s yuan savings fell 149.3 billion yuan ($23 billion) in the first 10 months of 2015 and posted a record monthly drop in September, according to the Hong Kong Monetary Authority. The contraction in yuan supply eased in November, HKMA Chief Norman Chan said last month, citing preliminary figures from banks.
The one-week yuan interbank rate in Hong Kong climbed 223 basis points to 8.28 percent on Wednesday, according to the Treasury Markets Association fixing. The yuan in Shanghai will drop 1.9 percent to 6.6 per dollar by the end of 2016, according to the median estimate in a Bloomberg survey of analysts. The offshore yuan has dropped 4.9 percent against the greenback this year, heading for its biggest annual loss since trading in Hong Kong started in 2010.
Borrowing costs in Shanghai rose to a two-month high as banks hoarded cash to meet client demand and to satisfy year-end regulatory requirements. The one-month Shanghai Interbank Offered Rate advanced four basis points to 2.99 percent, according to the National Interbank Funding Center. China’s foreign-exchange reserves shrank $213 billion in the four months through November.
"The rally in Shibor is mainly due to year-end factors," said Li Qilin, a Beijing-based analyst at Minsheng Securities Co. "The capital outflows triggered by the yuan depreciation also contributed to the rise."