Yuan Interbank Rate in Hong Kong Drops Into Negative Territory

  • Banks cutting deposits because of new reserve ratio: StanChart
  • Overnight rate at -3.7% while all other tenors stay positive

The interest rate to borrow yuan overnight in Hong Kong fell into negative territory for the first time, spurring speculation lenders are trying to trim deposits to limit the amount of funds that will be locked up as part of a new rule imposed by China’s central bank.

The overnight Hong Kong Interbank Offered Rate plunged 4.77 percentage points to minus 3.725 percent, according to a Treasury Markets Association fixing. All other tenors were positive, with the one-week rate falling to 1.24 percent and the one-month declining to 1.85 percent, the lowest in data going back to June 2013.

In an effort to punish speculation against the yuan, the People’s Bank of China in January imposed a reserve-requirement ratio on overseas banks’ yuan deposits held by onshore lenders. Offshore banks had previously faced a zero percent required reserve ratio on their yuan deposits on the mainland. As of Jan. 25, those funds were subject to the same ratio as Chinese banks.

“The reserve-ratio requirement is based on the account balance at the end of every quarter, so banks are trying to lend out as much as they can to reduce the amount of money that will be locked up for three months,” said Becky Liu, Hong Kong-based senior rates strategist at Standard Chartered Plc. “Overall liquidity conditions are very flush in the offshore yuan market.”

While the required reserve ratio varies for Chinese lenders, the biggest banks are required to freeze 17 percent of deposits as reserves. Yuan deposits held by clearing banks on the mainland will also be subject to the reserve ratios, people familiar with the matter said in January.

The offshore yuan strengthened 0.05 percent to 6.4734 a dollar as of 1:24 p.m. in Hong Kong on Thursday, extending its gain for the quarter to 1.47 percent. That’s the most since the three months through December 2011.

— With assistance by Helen Sun

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