Offshore Yuan Gains on Intervention Bets After Discount Widens

Updated on
  • Authorities will want the offshore-onshore gap to close: ANZ
  • Yuan ranked fifth in global payments rankings in September

The yuan in Hong Kong rose the most in seven weeks on speculation China’s central bank intervened to prop up the currency after its discount to the Shanghai spot price widened.

Large Chinese banks sold dollars in the offshore market in Asian trading hours Thursday, according to a foreign-exchange trader who asked not to be identified. The People’s Bank of China is looking to align the two rates as it seeks to meet the International Monetary Fund’s requirements for adding the yuan into its global reserves basket. Deviations between the onshore and offshore yuan imply the Hong Kong rate cannot be a perfect hedge for onshore exposures, the IMF said in a staff report in August.

The freely traded currency in Hong Kong climbed 0.62 percent to 6.3616 a dollar as of 4:56 p.m. local time, according to data compiled by Bloomberg. That’s the biggest gain since Sept. 10, when the PBOC was first seen to take the rare step of supporting the yuan’s offshore value. That’s 0.07 percent weaker than the onshore yuan, which closed 0.04 percent higher at 6.3567 in Shanghai. The gap was 0.7 percent at the close of onshore trading Wednesday. The PBOC weakened its reference rate by 0.09 percent to 6.3596.

Arbitrage Opportunities

"The central bank wouldn’t tolerate a wider gap, so offshore intervention is possible,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. "China is committed to having a high degree of capital-account openness. There will be large capital flows if arbitrage opportunities exist, which complicates the management of monetary policy.”

China’s capital controls mean the yuan is valued differently in Hong Kong’s offshore market than it is in Shanghai, creating a profit opportunity for arbitrageurs that are able to move funds between the two cities. The offshore price’s discount widened to more than 2 percent on Aug. 12, a day after the central bank devalued the yuan. The PBOC was seen intervening in overseas markets in September to close the gap.

China’s currency slipped back to fifth place in terms of usage for global payments in September, according to Society for Worldwide Interbank Financial Telecommunications. Yuan’s share of transactions declined to 2.45 percent last month from a record 2.79 percent in August, when it overtook the Japanese yen to rank fourth, Swift’s statement showed.

The Federal Open Market Committee dropped a reference to global risks as it held U.S. borrowing costs near zero and signaled it may make a policy move at the next meeting in December, preparing investors for the first rate increase since 2006.

“I would have expected the offshore yuan to weaken after the more hawkish Fed statement, in line with the other Asian currencies,” said Khoon Goh, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “I think the authorities will want the gap to close, as this was an issue raised by the IMF.”

— With assistance by Tian Chen

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