Yuan Cost Spike Spreads Onshore as Shibor at Seven-Month High

Updated on
  • PBOC won’t lower rates as long as bond leverage high: analyst
  • Borrowing costs climb before week-long mainland holidays

A spike in yuan borrowing costs offshore is spreading to mainland China, with rates in Shanghai climbing to seven-month highs amid speculation policy makers are looking to reduce leverage and keep the currency steady.

The one-day Shanghai Interbank Offered Rate rose to 2.17 percent on Thursday, the highest since Feb. 6, according to the National Interbank Funding Center. The comparable cost in Hong Kong surged to 23.7 percent on Monday, the highest since suspected central bank meddling roiled global markets in January.

While the People’s Bank of China has denied it intervened recently, it has also said that it wants to curb excessive leverage in the financial system. The monetary authority has in the past month restarted the use of both 14- and 28-day lending tools for the first time since February, spurring concern that it was looking to increase the use of more expensive, longer-term funding to cool a bond rally. Chinese markets will be closed in the week through Oct. 7.

“The central bank probably won’t have the intention to bring down interest rates much further” as long as leverage stays high in the bond and property markets, said Shen Bifan, an analyst in the fixed-income department at First Capital Securities Co. in Shenzhen. “The downside for money rates after the holidays should be quite limited.”

The overnight Shibor was little changed on Friday after the PBOC increased the supply of cash. It pumped in a net 670 billion yuan ($100 billion) this week, the most since April, using seven- and 28-day reverse-repurchase operations. The one-day Hong Kong Interbank Offered Rate climbed 15.73 percentage points, the second-biggest increase in history, on Sept. 19 before receding. It was at 1.55 percent Friday.

The seven-day repurchase rate,, a gauge of interbank funding availability, which increased to a one-month high of 2.52 percent on Wednesday, was at 2.33 percent as of 5 p.m. in Shanghai on Friday. Chinese government bonds advanced, with the 10-year yield dropping three basis points this week to 2.74 percent. The onshore yuan was little changed for the five-day period at 6.6701 per dollar, while the currency traded in Hong Kong was headed for a 0.4 percent decline, the most since the end of August.

Bond Leverage

A record rally in China sovereign debt has prompted traders to increase leverage to amplify returns, with transactions of overnight repo agreements climbing to a record 52.3 trillion yuan in August. New home prices in China rose the most in more than six years in August, with Shanghai recording a 31 percent gain from a year ago.

“The onshore overnight rate has been rising since they restarted the 14-day reverse repos,” said Becky Liu, Hong Kong-based senior rates strategist at Standard Chartered Plc. “It reflects a shift of interbank borrowing from the front-end to longer end. Signs of overheating in the property market and government intention to curb leverage are valid reasons why interbank rates have likely hit a floor.”