Yuan Depreciation Bets Ease in Hong Kong as China Boosts Costs

  • PBOC said to ask onshore lenders to stop cross-border funding
  • Move in line with aim of closing offshore-onshore gap: analyst

Pressure for the yuan to weaken in Hong Kong is receding after China tightened curbs on the flow of funds to offshore banks, a move that’s made it more expensive to borrow and short the currency.

The People’s Bank of China has given verbal guidance to onshore lenders to stop offering cross-border financing to offshore banks, according to people familiar with the matter. The monetary authority has also told overseas banks to halt onshore bond repurchases, two of them said.

The moves come as policy makers struggle to narrow the spread between exchange rates in Hong Kong and Shanghai, a gap that raises questions about the market value of the currency and hampers China’s push for greater global usage. The freely-traded offshore rate is 0.4 percent weaker than the onshore level. The Hong Kong rate swung rapidly from a loss to a gain on Monday afternoon amid suspected intervention by the PBOC after the discount exceeded 0.6 percent.

“These kind of curbs would be in line with the PBOC’s goal of narrowing the spread between the onshore and offshore yuan,” said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Hong Kong. “It could make short-selling offshore yuan more expensive for overseas banks while at the same time its liquidity injections keep onshore liquidity ample. So the offshore exchange rate would strengthen but the onshore won’t.”

Yuan Advances

The yuan in Hong Kong rose 0.03 percent to 6.4118 a dollar as of 4:54 p.m. local time, according to data compiled by Bloomberg. In Shanghai, the currency was little changed at 6.3840, resulting in a gap of 278 pips. The spread has stayed within 300 for much of the past three days after suspected intervention narrowed the difference from above 400 on Monday.

The mismatch between the yuan’s price at home and abroad means the offshore rate can’t be used as a perfect hedge for onshore exposure, the International Monetary Fund said in August. The agency is set to rule this month on China’s ambition for the yuan to become a reserve currency. Reports of the new cross-border financing curbs drove up Hong Kong’s borrowing costs in the Chinese currency, with the one-week Hong Kong Interbank Offered Rate climbing 18 basis points to a six-week high of 4.64 percent on Wednesday. It was at 4.58 percent on Thursday.

Tightening Liquidity

"The restrictions would tighten liquidity in the offshore market and support the yuan’s exchange rates in Hong Kong," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in the city. "The onshore yuan is strengthening partly because the fixing was set stronger than Wednesday’s close. Also, the currency will likely be kept stable before the IMF announces its final decision."

The PBOC set the yuan’s reference rate at 6.3791 a dollar on Thursday, or about 0.1 percent stronger than the onshore spot rate’s Wednesday close. The International Monetary Fund staff last week recommended the yuan be added to the institution’s Special Drawing Rights basket, alongside the dollar, euro, pound and yen.

— With assistance by Tian Chen, and Fion Li

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