Offshore Yuan Declines on Bets PBOC Paused Market Intervention

  • Central bank keeps fixing little changed for a fifth day
  • Hong Kong dollar drops most since 2003 on yuan concern

Making Sense of the Chinese Markets

The yuan traded overseas fell for the first time in six days on speculation a narrowing gap with the onshore rate dissuaded China’s central bank from stepping into the market to prop up the currency.

Yuan interbank rates in Hong Kong extended declines from record highs as well, indicating liquidity eased as local stocks sank below levels reached during last year’s rout. The Hong Kong dollar retreated by the most since 2003 as investors began to lose confidence in Chinese assets, while bond yields on the mainland fell to the lowest in data going back to 2007 on haven demand.

The yuan traded in Hong Kong fell 0.65 percent to 6.6173 a dollar in Asian trading and was at 6.6070 as of 4:40 p.m. in London, according to prices compiled by Bloomberg. The currency erased its discount to the onshore rate on Tuesday for the first time since October. The yuan in Shanghai fell 0.22 percent to 6.589 by close of trading.

“The offshore yuan declined because liquidity eased and the costs to long the dollar against the currency reduced, which encourages bears to build their short yuan positions," said Ken Cheung, a Hong Kong-based strategist at Mizuho Bank Ltd. "The market’s expectation for central bank intervention is low as the onshore-offshore gap is small. Given the fragile sentiment in the global market, I believe that the People’s Bank of China will maintain a stable yuan in the near term."

Stable Fixing

The monetary authority kept the yuan’s reference rate little changed for the fifth day in a row, setting it at 6.5616 a dollar, or 0.2 percent stronger than Wednesday’s official onshore closing price. The Shanghai Composite Index declined below August’s low of 2,927.29 before rebounding to close 1.97 percent higher.

The yuan has fallen 5.8 percent in Shanghai since a surprise devaluation on Aug. 11, even as the central bank burnt through $321 billion of its foreign-exchange reserves supporting the currency over the last five months.

Government bonds erased early gains, with the 10-year yield climbing three basis points to 2.76 percent. It earlier fell to a record 2.70 percent as the central bank added the most cash through open-market operations since February 2015 and the volatile stock and currency markets drove demand for safety.

“Equities are not performing well, so bonds become the natural investment target,” said Li Liuyang, Shanghai-based chief financial market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd.. “The PBOC increased reverse repo offerings partly because it may be taking some preemptive measures before next month’s Lunar New Year holidays.”

Cash Injection

HSBC's Bloom Says Speed of Yuan Drop Is Frightening

The PBOC conducted 160 billion yuan ($24 billion) of seven-day reverse-repo agreements in its open-market operationson Thursday, up from 70 billion yuan a week ago. The overnight cost of borrowing yuan in Hong Kong declined 4.7 percentage points to 3.61 percent, extending its decline from an an all-time high of 66.82 percent on Tuesday.

“The PBOC wants to keep liquidity abundant onshore to bolster the economy," said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. "It’s also trying to calm the currency market as the yuan declined significantly last week and caused high volatility. But in the long run, the yuan will depreciate as the fundamentals are still weak."

Hong Kong Dollar

The Hong Kong dollar dropped 0.31 percent to HK$7.7858 versus the greenback. The Hang Seng Index of shares fell 0.6 percent.

The decline in the city’s currency spurred speculation that its 32-year-old link to the U.S. dollar will break as investors lose confidence in Chinese assets. While the yuan’s depreciation does drive haven demand for the Hong Kong dollar, a sharp depreciation in the yuan would spur concern on the city’s peg, said Mirza Baig, head of foreign-exchange and interest-rate strategy for Asia Pacific at BNP Paribas SA in Singapore.

Chinese authorities have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990.

“We don’t believe the renminbi will have a sharp devaluation because it doesn’t make sense for China to do that,” Raymond Chan, chief investment officer for Asia Pacific at Allianz Global Investors, said at briefing in Hong Kong on Thursday. “Global growth is very weak and by depreciating the currency, it’s not going to help much. You only create competitive devaluations and no one is going to benefit from that.”

— With assistance by Tian Chen, and Helen Sun

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