Offshore Yuan Reverses Losses on Suspected PBOC Intervention

  • Currency swung from loss to a 0.3% gain in space of 3 minutes
  • IMF staff recommend China's currency be added to SDR basket

The yuan jumped sharply in offshore trading, reversing earlier losses, on suspected intervention by China’s central bank.

The currency swung to a 0.3 percent gain versus the dollar as of 2:40 p.m. Hong Kong time, having been 0.13 percent weaker on the day just three minutes earlier. The surge came about after the offshore yuan’s discount to the onshore spot rate widened to the most this month, thwarting China’s goal of having the rates converge. The offshore yuan, which trades freely, was 0.14 percent stronger at 6.3980 a dollar as of 4:43 p.m. in Hong Kong, according to data compiled by Bloomberg.

International Monetary Fund Managing Director Christine Lagarde announced late Friday that her staff have recommended the Chinese currency be included in the fund’s Special Drawing Rights, alongside the U.S. dollar, euro, pound and yen. The recommendation makes approval by the fund’s executive board this month all but certain, as major IMF shareholders including the U.S. have said they will support inclusion if the yuan meets the Washington-based institution’s criteria. The board will meet Nov. 30.

"It should be the PBOC propping up the yuan as it seeks to narrow the gap between the onshore and offshore rates before the IMF takes it final decision in two weeks," said Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia. "The PBOC will likely refrain from heavy intervention after the final approval, as economic fundamentals remain weak and that helps to save some foreign-exchange reserves."

The onshore yuan, which can move as much as 2 percent either side of the central bank’s daily fixing, rose 0.03 percent to close at 6.3724 a dollar in Shanghai. That’s a difference of 256 pips with the offshore currency. The gap exceeded 400 pips earlier, a level last seen in the final week of October that led to suspected PBOC intervention to support the yuan in Hong Kong.

"An onshore-offshore spread of 400 to 500 pips is where we could see intervention coming in," said Eddie Cheung, a Hong Kong-based strategist at Standard Chartered Plc. "This is an underlying market issue. The ultimate aim is there should be a single exchange rate and the two spot rates are set to converge."

The difference between the offshore and onshore yuan exists because China restricts cross-border capital flows. The PBOC lowered its daily yuan reference rate for a 10th day, the longest run of declines since 2008. It cut the fixing by 0.15 percent to 6.3750 a dollar, the weakest since Sept. 25.

Outflows Abate

China devalued its currency on Aug. 11 and concerns about further depreciation and slowing economic growth, coupled with the prospect of a U.S. interest-rate increase, triggered a record exodus of funds and prompted the central bank to intervene to support the yuan.

Chinese financial institutions including the central bank bought foreign exchange in October for the first time in five months, a sign capital outflows abated. A gauge of their foreign-currency assets increased by 12.9 billion yuan ($2 billion), after a record drop of 761 billion yuan in September, People’s Bank of China data showed Sunday.

"Data suggest that capital outflows have eased thanks to the effort by the PBOC in stabilizing the currency market," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. "However, given the recent strength of the U.S. dollar, the yuan is still facing strong depreciation pressure in the near term."

— With assistance by Tian Chen, and Fion Li

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