PBOC Seen Tightening Grip on Yuan Rates Gap as IMF Review Looms

  • Offshore yuan rose toward onshore on suspected intervention
  • Exchange-rate divergence hampers IMF push, analysts say

China shows signs of becoming less tolerant of divergence between its onshore and offshore exchange rates in the run-up to a decision on whether the yuan will be added to the IMF’s basket of reserve currencies.

The gap between the Hong Kong and Shanghai rates widened to about 260 pips during early trading on Friday, before a sharp appreciation of the offshore yuan at about 10 a.m. caused the spread to shrink to less than 100 pips within 20 minutes, data compiled by Bloomberg show. The yuan traded at 6.3693 per dollar in Hong Kong as of 2:47 p.m. local time and it was changing hands at 6.3521 in Shanghai, a spread of 172 pips. The difference exists because China restricts cross-border capital flows.

"China has been explicit in its desire for onshore and offshore yuan convergence," said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. "Recent episodes of intervention would arise around 400 pips, whereas it appears that 250-300 is enough to prompt intervention now."

PBOC Seen Becoming Less Tolerant of Divergence

The International Monetary Fund said in August that a market-based representative exchange rate would be needed for the yuan to join its Special Drawing Rights, which currently comprises dollars, euros, yen and British pounds. The lender’s executive board is due to make a decision on the Chinese currency’s inclusion at a review this month.

The authorities seem very sensitive to the spread between the offshore and onshore spot rates, partly because they’re concerned any large dislocations may reduce the yuan’s chances of joining the SDR basket, BNP Paribas SA analysts Mirza Baig and Jasmine Poh wrote in a note on Thursday.

Foreign Reserves

The PBOC will trade in the currency market when there are not enough positions, but that differs from large-scale intervention, Wang Xiaoyi, deputy administrator of the State Administration of Foreign Exchange, said at an Oct. 22 press conference. It’s normal for China to use its foreign-exchange reserves to stabilize expectations in the currency market in the short term, he said. The central bank didn’t immediately reply to a fax seeking comment on whether it intervened on Friday.

China’s reserves probably fell by $49 billion in October, according to the median projection of analysts surveyed by Bloomberg before data due Saturday. The stockpile, still the world’s largest at $3.51 trillion, shrank $43.3 billion in September and and by a record $93.9 billion in August as the PBOC sold U.S. currency to support the yuan following a surprise devaluation on Aug. 11.

The offshore yuan swung from a daily loss of 0.12 percent against the dollar to a 0.24 percent advance in the space of about 20 minutes in morning trading.

“The sudden move was the result of PBOC intervention,” said William Wong, head of equities sales trading at Shenwan Hongyuan Group Co. in Hong Kong.

— With assistance by Tian Chen, and Fion Li

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