Hong Kong Yuan Interbank Rates Surge as Currency Loses Ground

  • Overnight Hibor rises most since record cash crunch in January
  • PBOC is switching to daily open-market operations onshore

Yuan borrowing costs in Hong Kong climbed to one-month highs, a sign of renewed appetite for bets against the currency.

The Hong Kong Interbank Offered Rate for overnight loans jumped 481 basis points to 9.3 percent, a Treasury Markets Association fixing shows. That’s the biggest increase since Jan. 12, when it soared to an unprecedented 66.82 percent as China’s central bank engineered a cash crunch to curb bearish yuan wagers. One-week Hibor surged 246 basis points to 7.90 percent on Friday and the one-month rate increased 115 basis points to 6.95 percent.

“Rates gained as short-sellers needed to roll over positions," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. "Restrictions on cross-border flows and less hope for a cut in reserve-requirement ratios on onshore yuan deposits” were also a factor, he said.

Rising yuan rates in Hong Kong make it costlier for global investors to borrow and sell the currency, which has rebounded 3.6 percent in the offshore market since sinking to a five-year low on Jan. 7. China’s central bank stepped up intervention last month to support the exchange rate after the level in Hong Kong slid to a record 2.9 percent discount to that in Shanghai. In addition to buying yuan in the offshore market, the authority also tightened curbs on capital outflows to restrict the currency’s supply in Hong Kong.

The People’s Bank of China may have had a hand in the latest spike in yuan borrowing costs in Hong Kong, according to Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. Declines in the exchange rate have halted around the 6.53 per dollar level and "liquidity has been tightened up over recent days," he said.

The offshore yuan fell 0.06 percent to 6.5268 as of 1:35 p.m. in Hong Kong, set for a 0.28 percent decline for the week.

Onshore Market

While monetary conditions are tightening in the offshore yuan market, the opposite is true on the mainland where banks are still flush with cash after the PBOC flooded the financial system with funds before last week’s Lunar New Year holiday.

The overnight repurchase rate, a gauge of interbank liquidity, fell to this year’s low of 1.87 percent on Friday, a weighted average from the National Interbank Funding Center shows. The central bank’s open-market operations added a net 1.7 trillion yuan ($261 billion) to the financial system in the five weeks leading up to the Lunar New Year and has removed 455 billion yuan since the break, data compiled by Bloomberg show.

The PBOC said yesterday that it will start conducting open-market operations every business day, strengthening its ability to influence interest rates. The central bank had introduced daily auctions from Jan. 29 to manage liquidity around the Lunar New Year holiday, a period when surging fund demand has led to cash squeezes in the past, and was due to revert to twice-weekly auction windows -- on Tuesdays and Thursdays -- from next week. It said the extension of the current schedule aims to improve the effectiveness of the operations, which adjust short-term liquidity in the banking system.

“Rates have fallen as the market is feeling more confident after the PBOC signaled that it will provide liquidity when it’s needed,” said Zhou Hao, an economist at Commerzbank AG in Singapore.

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