Yuan Rates Jump in Hong Kong as Currency Gap Drives Arbitrage

  • Overnight rate rises most in three months as yuan plunges
  • Offshore liquidity will remain very tight, StanChart says

The cost of borrowing yuan in Hong Kong jumped the most since September on concern speculators are shipping the currency onshore to take advantage of the difference in its rates at home and abroad.

The freely traded offshore yuan fell Monday to trade 1.6 percent weaker than the rate in Shanghai, the biggest difference in three months, creating an incentive for companies to buy overseas and sell in the domestic market. The supply of yuan abroad has tightened also on signs that China is taking steps to make it costlier to short the currency as it tries to narrow the spread.

The overnight Hong Kong Interbank Offered Rate surged 3.26 percentage points, the most since Sept. 29, to 5.02 percent, a Treasury Markets Association fixing shows. The one-week rate climbed 1.06 percentage points to 6.09 percent, while the three-month rate rose 29 basis points to 5.75 percent.

“The gap has been widening for a long time, and with a gap corporates can arbitrage it and bring liquidity back to China,” said Becky Liu, a rates strategist at Standard Chartered Plc in Hong Kong. “Since early November, the People’s Bank of China has been disconnecting onshore and offshore liquidity. Without tapping onshore liquidity, offshore liquidity will just remain very tight."

The yuan in Hong Kong slid 0.66 percent to 6.6131 a dollar as of 12:54 p.m. local time, compared with the spot rate of 6.5097 in Shanghai. The offshore rate has traded at a discount since October as the PBOC propped up the onshore rate to counter mounting expectations for further declines.

China has suspended at least two foreign banks from conducting some cross-border yuan business until late March, limiting their scope to profit from the widening gap between the currency’s exchange rates, according to people with direct knowledge of the matter. Offshore funding costs won’t fall much unless there are enough arbitrage activities or the currency outlook stabilizes, which is unlikely in the near-term, Liu said.

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