Offshore Yuan Pares Gains as Trade Data Signal Demand Slowdown

  • PBOC may be defending level of 6.7 against dollar, OCBC says
  • Yuan borrowing costs in Hong Kong surge to February high

The offshore yuan pared gains as a slide in imports prompted speculation that China’s central bank will ease monetary policy to boost consumer demand.

A third monthly decline in exports also damped sentiment, showing the limitations of China’s strategy of boosting shipments by weakening the yuan against the exchange rates of its trade partners. The yuan earlier surged in Hong Kong as a shortage of the currency and surging borrowing rates pushed up the cost of betting against the exchange rate.

The yuan traded in Hong Kong was little changed at 6.6971 a dollar as of 4:32 p.m., according to data compiled by Bloomberg. It earlier strengthened by as much as 0.27 percent. The onshore yuan climbed 0.04 percent to 6.6899 in Shanghai. A Bloomberg replica of the CFETS RMB Index rose, paring its decline for the year to 6.4 percent.

"The larger-than-expected drop in imports suggests that domestic demand is still weak, which means that PBOC will likely keep its monetary policy accommodative to spur growth and continues with depreciation of the yuan basket," said Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd. "But it seems that the government will cap the yuan at just below 6.7 against the dollar for now."

Borrowing Costs

The yuan overnight interbank rate in Hong Kong jumped to a five-month high on Wednesday as lenders set aside cash to meet regulatory requirements and on speculation authorities were tightening funding conditions to curb declines in the currency. China’s central bank intends to avoid any quick slides that could trigger massive short yuan positions, according to Commerzbank AG.

“There’s some speculation of a liquidity squeeze in the short-end," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "It feels like the People’s Bank of China is quite serious about defending the 6.7 level. This reminds me of what happened in January.”

The overnight cost of borrowing yuan in Hong Kong surged to an improbable 66.8 percent in January as the PBOC mopped up supplies of the currency in an effort to punish speculators who try and profit from the difference in the yuan’s rates at home and abroad. The one-day interbank rate surged 2.46 percentage points on Wednesday to 4.83 percent, the highest since Feb. 22, according to a fixing from the Hong Kong Treasury Markets Association.

Reserve Requirement

The rates are surging this time round also because lenders have to comply with a reserve-requirement rule on yuan deposits held on the mainland at offshore participant banks, said Frances Cheung, head of Asia ex-Japan rates strategy at Societe Generale SA in Hong Kong. Offshore banks had previously faced a zero percent required reserve ratio on their yuan deposits on the mainland. As of Jan. 25, those funds were subject to the same ratio as Chinese banks.

China’s overseas shipments fell 4.8 percent in June in dollar terms, official data showed Wednesday. Imports shrank 8.4 percent, compared with a Bloomberg survey’s prediction of a 6.2 percent drop.

— With assistance by Justina Lee, and Tian Chen

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