China yuan devaluation 2015

PBOC’s ‘shock and awe’ won this round of the battle, but not the war with currency speculators

Offshore yuan interbank lending rate hits stratosphere in battle to punish speculators

PUBLISHED : Tuesday, 12 January, 2016, 10:33pm
UPDATED : Tuesday, 12 January, 2016, 10:33pm

Hong Kong has become ground zero for a battle between the People’s Bank of China and currency speculators, as the central bank employed a shock and awe tactic in defence of the currency by pushing the overnight funding rate to 200 per cent Tuesday afternoon.

Alleviating pressure on the offshore yuan is not without cost for the People’s Bank, however, as it may slow down progress for the internationalisation of the yuan.

The PBOC intervened in the offshore yuan market during the past two days by buying yuan which drove the yuan interbank market to a record high 200 per cent Tuesday, up from 25 per cent Monday and from Friday’s level of 4 per cent.

Pheona Tsang, head of fixed income of BEA Union Investment, said the PBOC intervention was reasonable after the offshore yuan dropped 1.75 per cent against the US dollar last week.

By Tuesday afternoon the yuan had recaptured all of its lost ground last week to trade at 6.5650 per US dollar in the afternoon.

“PBOC does not want the yuan to drop so rapidly so it has to intervene. This is in line with other central bank practises. The yuan has gone up so the PBOC intervention has been successful,” Tsang said.

Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs is the latest mainland official to offer vocal support for the yuan. He said in New York on Monday in a Bloomberg report that currency traders who believe the yuan will fall substantially against the US dollar are “ridiculous,” and those who short sell the currency could be on the wrong track.

Analysts however warn the PBOC intervention will have negative consequences.

“The need to quell speculation and the need to intervene or slow the opening up of the mainland markets will certainly lengthen the time and speed of internationalization,”said Brett McGonegal, co-chief executive of Reorient Group.

“Currency speculators will get hurt and so will short term corporate borrowings.”

Jasper Lo Cho-yan, director of Tung Shing Futures, said market sentiment remains weak and that he and many traders still believe the yuan will fall 10 per cent this year.

“This means the PBOC will need to continue its intervention while it may also ask other central banks to join hands to do so,” Lo said.

The PBOC last night said it has six foreign institutions including central banks such as the Reserve Bank of India and Monetary of Singapore and Bank of International Settlements ready to enter China’s interbank foreign exchange market.

Keith Pogson, a senior partner at accounting firm EY said the PBOC intervention was intended to curb an overly rapid devaluations of the yuan traded in Hong Kong.

in Hong Kong was due to the concern on the rapid devaluation of the yuan.

“The offshore yuan Hibor is relatively low in liquidity, so easy to put a squeeze on particularly if you arrange a consistent buying frenzy, as we saw in the market yesterday,” Pogson said.

“There will be some bruised investors particularly if funding at relatively short tenures. For the Hong Kong market place, this is a cost of being part of the yuan internationalisation process. We are increasingly directly in that aura of influence.”

Wilson Chan, associate director of the MBA Programme of City University of Hong Kong, said the PBOC appears to have won the battle with speculators but not the war.

“This is just the beginning of a currency battle between PBOC and the currency speculators. This kind of battle has been seen in the 1992 British pound and the Thai Baht and other Asian currencies in 1998. Eventually, the central banks bowed to the market force,” Chan said.

“The PBOC will need to fight for a long term battle which would expensive as it will cut down its forex reserve further .”

China forex reserves have dropped more than US$600 billion from the all-time peak of US$3.99 trillion in June 2014.