Yuan Loan Rates Soar in Hong Kong as PBOC Halts Currency's Slide

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China Yuan Fairly Valued at 10-15% Drop: de Longis
  • Central bank currency fixing little changed for a second day
  • PBOC intervention caused shortage of yuan, StanChart says

Interbank yuan lending rates in Hong Kong climbed to records across the board and the exchange rate surged the most in four months after suspected intervention by China’s central bank last week mopped up supplies of the yuan in the offshore market.

The city’s benchmark rates for loans ranging from one day to a year all set new highs, with the overnight and one-week surging by the most since the Treasury Markets Association started compiling the fixings in June 2013. The overnight Hong Kong Interbank Offered Rate surged 939 basis points to 13.4 percent on Monday, while the one-week rate jumped 417 basis points to 11.23 percent. The previous highs were 9.45 percent and 10.1 percent, respectively.

“Yuan liquidity is extremely tight in Hong Kong,” said Becky Liu, senior rates strategist at Standard Chartered Plc in the city. “There was some suspected intervention by the People’s Bank of China last week, and the liquidity impact is starting to show today.”

The offshore yuan rebounded from a five-year low last week amid speculation the central bank bought the currency, an action that drains funds from the money market. Measures restricting overseas lenders’ access to onshore liquidity -- which make it more expensive to short the yuan in the city -- have also curbed supply.

Yuan Convergence

The PBOC has said it wants to converge the yuan’s rates at home and abroad, a gap that raises questions about the currency’s market value and hampers China’s push for greater global usage as it prepares to enter the International Monetary Fund’s reserves basket this October. The offshore yuan’s 1.7 percent decline last week pushed its discount to the Shanghai price to a record, prompting the IMF to say that it will discuss the widening spread with the authorities.

The Chinese currency traded in Hong Kong’s free market rose 0.81 percent, the most since Sept. 10, to 6.6289 a dollar as of 5:21 p.m., after declining as much as 0.37 percent. It sank as low as 6.7618 last week, within 0.4 percent of a record 6.7850 seen in September 2010, before suspected PBOC intervention. The onshore currency advanced to 6.5792, or 0.76 percent stronger than the offshore rate. That’s the narrowest spread since Dec. 4.

Stable Fixing

The PBOC set the yuan’s reference rate, which restricts onshore moves to a maximum 2 percent on either side, at 6.5626 a dollar on Monday, little changed from 6.5636 on Friday and 6.5646 the previous day. The monetary authority last week ended an eight-day run of reductions to the fixing that sent shockwaves through financial markets and escalated fears of a global currency war.

"The interest rate for borrowing the yuan is very high in Hong Kong, which makes it expensive to short the currency and that’s supporting the exchange rate," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. "The PBOC’s fixing today helped stabilize sentiment. The central bank showed its intention that it doesn’t want the yuan to weaken in a profound way and wants to keep it stable against a basket of currencies."

The efforts to calm markets fell short on Monday, with the Shanghai Composite Index sliding 5.3 percent after the nation’s producer price index slumped 5.9 percent in December. The PBOC will seek to keep the yuan’s exchange rates “basically stable” at reasonable and equilibrium levels and work to further promote the internationalization of the currency, it said in a statement on its website Friday.

Currency Swap

The Chinese central bank and the Hong Kong Monetary Authority renewed a 400 billion yuan ($61 billion) currency swap agreement for three years in 2014. They have signed three terms of such agreements since 2009. The HKMA, the city’s de-facto central bank, didn’t immediately respond to a request for comment on the surging yuan rates.

“Unless interest rates reach a level so high that they affect financial stability, it’s unlikely that the HKMA will intervene,” said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd. “They are most likely to take a wait-and-see approach.”

— With assistance by Justina Lee, Tian Chen, Saijel Kishan, and Helen Sun

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