PBOC Spurs Offshore Yuan's Biggest Weekly Advance Since October

  • Authorities prop up currency in Hong Kong, restrict outflows
  • Exchange rate to stabilize on improving economy: analyst

The offshore yuan posted the biggest weekly gain since October as China’s central bank limited the currency’s supply and forced a narrowing of its discount to the mainland rate.

The monetary authority repeatedly bought the currency in Hong Kong this week, sending interbank borrowing costs to an all-time high. Yuan positions at the People’s Bank of China dropped the most on record in December, suggesting increased intervention to support the yuan as well as rising capital outflows. The nation’s foreign-exchange regulator was said to have verbally instructed some onshore banks to stop yuan leaving the mainland and reduce offshore liquidity.

The yuan traded in Hong Kong rose 1 percent from Jan. 8, the most since October and swinging from the worst weekly performance since the currency’s August devaluation. It was little changed at 6.6171 a dollar as of 5:04 p.m. local time on Friday, 0.5 percent lower than the onshore spot price of 6.5858.

"The offshore yuan will remain stable in the coming two weeks, as the PBOC seeks to improve sentiment and the economy shows signs of recovery," said Banny Lam, co-head of research at the Agricultural Bank of China International Securities Ltd. in Hong Kong. "The capital controls will be temporary, as the goal is to stem volatility that’s spreading all over the world.”

Stable Fixing

The monetary authority kept the yuan’s reference rate little changed from Jan. 8, after a 1.1 percent drop last week rattled financial markets from Shanghai to New York. The onshore currency has fallen 5.7 percent since the devaluation on Aug. 11, even as the central bank burnt through $321 billion of its foreign-exchange reserves to support the currency.

The offshore yuan erased its discount to the Shanghai rate on Tuesday for the first time since October amid central bank intervention. The nation’s exports unexpectedly rose in December, suggesting a weaker currency is beginning to boost the economy.

The Hong Kong dollar fell 0.15 percent to HK$7.7937 versus the greenback. That takes its two-day drop to 0.4 percent, the most since October 1992.

Soothing Nerves

Chinese officials attempted to soothe frayed nerves this week. Betting against the yuan will fail and calls for a large decline are “ridiculous” as policy makers are determined to ensure stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said on Monday in New York. Pressure on the yuan is expected to ease, Ma Jun, chief economist at the monetary authority’s research bureau, said in comments posted on the PBOC’s website the same day.

"The offshore yuan’s gains in the last few days may not be sustainable, as the depreciation pressure remains and risk-off sentiment still dominates," said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. "The PBOC is likely to step back from intervention for now as the onshore-offshore gap is at an acceptable level. While the memories of PBOC intervention are still fresh, market participants may not short the yuan aggressively."

— With assistance by Tian Chen

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