Offshore Yuan Drops Most in Five Months as U.K. Votes for Brexit

  • PBOC injects most funds this week since April via operations
  • Sovereign bonds rally as one-year rate swaps at two-month low

The offshore yuan slumped by the most in five months and Chinese government bonds rallied after the U.K. voted to leave the European Union.

The yuan traded in Hong Kong slid 0.8 percent to 6.6402 per dollar as of 4:31 p.m., while the onshore yuan weakened 0.5 percent in Shanghai. The final count showed voters backing “Leave” by 52 percent to 48 percent. While the yuan’s drop in Hong Kong was the biggest since January, its loss paled in comparison with global currencies. The pound plunged more than 6 percent and the euro slid by the most since it was introduced in 1999.

The U.K. voted to quit the European Union after more than four decades in a stunning rejection of the continent’s postwar political and economic order, setting the nation up for years of talks with the EU. Investors have been glued to Britain’s debate on EU membership in recent weeks as governments and central banks around the world warned that a vote for Brexit could hurt global economic growth and destabilize financial markets.

“The yuan looks to stand out among currencies as the market isn’t fully opened yet to global investors,” said Li Liuyang, Shanghai-based market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd. “In the case of a Brexit, the spillover impact on the yuan will be negative in the short-term.”

Chinese government bonds gained, with the yield on notes due May 2026 falling three basis points to 2.90 percent, the lowest since May, as the cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, dropped six basis points to a two-month low of 2.45 percent.

“The UK vote to leave the EU casts clouds over China’s external environment,” Harrison Hu, chief greater China economist at Royal Bank of Scotland Plc, wrote in a note. As the yuan weakens above 6.60, “the expectations of domestic corporates and households may be unsettled, intensifying capital outflows and disrupting domestic liquidity,” he said.

Brexit will have a deep impact on the market, the official Xinhua News Agency reported, citing Vice Finance Minister Zhu Guangyao as saying. China needs time to evaluate the consequences of Brexit, Hua Chunying, spokeswoman for the Ministry of Foreign Affairs, said at a briefing on Friday.

The Chinese government is seeking a stable yuan before it officially enters the International Monetary Fund’s reserve basket on Oct. 1, joining the dollar, euro, yen and pound. Premier Li Keqiang told central bank officials on Monday that China’s currency settings should remain stable and transparent, according to a person familiar with the matter.

Stability Sought

Apart from the Japanese yen, which is seen as a safe haven, global currencies and stocks tumbled on Friday. Hong Kong’s Hang Seng Index and a gauge of mainland shares in the city both plunged 2.9 percent, while the Shanghai Composite Index fell 1.3 percent.

The European Union was China’s largest trading partner last year, with two-way trade totaling $564.9 billion, according to customs data. The Chinese currency has fallen against all but one of 30 major global peers in the past month, including losses of more than 6 percent versus the South African rand and the New Zealand dollar, while a Bloomberg replica of CFETS RMB Index is near the lowest level since 2014.

Direct trading between the yuan and the Korean won will start from Monday at the CFETS. It can help lower currency exchange costs and boost use in bilateral trade and investment, the People’s Bank of China said.

China’s central bank pumped in a net 340 billion yuan ($51 billion) via open-market operations this week, the biggest injection since April, data compiled by Bloomberg show. At the PBOC meeting on Monday, an assistant governor of the central bank told Premier Li that a mid-year liquidity squeeze is unlikely this year, and that liquidity is relatively stable.

The seven-day repurchase rate, a gauge of interbank funding availability, rose four basis points to 2.38 percent, the highest in almost two months, according to National Interbank Funding Center prices.

— With assistance by Tian Chen, and Helen Sun

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