Offshore Yuan Heads for Best Week Since January as Rates Climb

  • Authorities seen tightening controls on yuan, M&A outflows
  • 10-year yield set for biggest weekly increase since May 2015

The offshore yuan headed for its biggest weekly advance in more than 10 months after money-market rates climbed, policy makers tightened curbs on capital outflows and the dollar’s three-week rally faltered.

China’s currency in Hong Kong gained 1 percent versus the dollar this week as overnight yuan borrowing costs in the city increased to the highest level in more than two months, making it more expensive to execute bearish bets. The offshore rate strengthened to trade at a premium to the onshore level for the first time in a month. China’s 10-year sovereign bond yields headed for the biggest weekly gain since May 2015, propelled by signs of stabilizing economic growth.

With higher U.S. interest rates and the annual reset of Chinese citizens’ foreign-exchange quotas looming, authorities have implemented a series of measures this week to make it harder to move money out of the country. Officials will use a combination of administrative hurdles and market intervention to prevent a disorderly slide in the yuan, according to Enrique Diaz-Alvarez, chief risk officer at Ebury Partners, the most accurate forecaster of Asian emerging-market currencies tracked by Bloomberg last quarter.

"We are looking for the yuan to stabilize against the dollar in the short term, then continue a very mild depreciation into 2017," Diaz-Alvarez said.

The offshore yuan was little changed at 6.8799 per dollar as of 5:02 p.m. in Hong Kong, while the onshore rate was steady at 6.8864. A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, was near the highest level since August. The Bloomberg Dollar Spot Index has dropped 0.4 percent this week.

Capital Curbs

Chinese authorities were said to have crafted measures including a suspension on several categories of overseas acquisitions and a request for banks to ask onshore corporate clients to register at local foreign exchange regulators before making yuan loans to overseas companies. The equivalent of $275 billion exited the nation via yuan payments in the first 10 months of the year, versus an inflow of $101.5 billion in the same period of 2015.

People’s Bank of China Deputy Governor Yi Gang said on Sunday that the nation’s foreign reserves are "very ample" and the yuan will remain stable, while Guan Tao, a former official with the State Administration of Foreign Exchange, wrote in a commentary on Thursday that yuan bears were being stubborn. China should reduce intervention in the currency market but step up capital controls to firmly suppress outflows, Yu Yongding, a former advisor to the PBOC, said at a conference in Beijing Friday.

Overnight forwards points for the offshore yuan touched 47.5 on Friday, the highest level in more than two months, suggesting there’s a shortage in the supply of the currency in the overseas market. The yuan’s overnight interbank rate in Hong Kong rose 2.34 percentage points to 7.159 percent Friday, according to fixing from the Treasury Markets Association.

In September and February, the PBOC was seen to have mopped up offshore liquidity to make it more expensive for traders to bet against the yuan. The extra cost for options to sell the Chinese currency against the dollar over contracts to buy fell 41 basis points this week, the most since July.

Rates Rise

"More restrictive outflows from China, possibly the impact of currency intervention combined with the year-end effect, are pushing up offshore funding costs," said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale SA. The offshore yuan’s liquidity will continue to be volatile in the near term due to outflow pressures from China, Cheung said.

Yields on government notes due August 2026 rose 16 basis points this week to 3.05 percent, according to National Interbank Funding Center prices, helped in part by an increase in the country’s official factory gauge. That’s the biggest gain since May 2015, according to ChinaBond Data. The one-month Shanghai Interbank Offered Rate climbed for the 17th consecutive day, the longest streak since June 2015, to 2.92 percent on Friday, the highest since February.

China Development Bank canceled the issuance of a 30-year upsized bond auction on Friday, without giving a reason, according to a notice posted on the website of China Central Depository & Clearing Co.

"The slump in the cash bond market, coupled with liquidity tightness, is having a spillover effect on the primary market," said Huang Wentao, a fixed-income analyst at China Securities Co. “The bond market correction will probably continue, with the next target level for the 10-year yield at 3.2 percent.”

— With assistance by Tian Chen, and Helen Sun

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE