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Offshore yuan interest rate rockets to 200 per cent, with the People’s Bank eager to punish speculators

Spread between Shanghai and Hong Kong traded yuan narrows as interbank borrowing costs hit record high

PUBLISHED : Tuesday, 12 January, 2016, 12:10pm
UPDATED : Wednesday, 13 January, 2016, 8:30am

The battle between the People’s Bank of China and currency speculators has led borrowing costs for offshore yuan in Hong Kong to shoot up to 200 per cent Tuesday, with analysts saying the central bank is keen to defend the currency and fend off speculative attacks.

The PBOC through several mainland banks banking network has continued to intervene in the offshore yuan market to buy yuan and sell the US dollar Tuesday, the second day of heavy intervention this week, analysts said. This has weighed negatively on liquidity and led speculators and other traders to raise cash at high cost to cover their positions, boosting offshore yuan and narrowing the spread between the onshore and offshore yuan.

The Hong Kong interbank offered rate for offshore yuan, or CNH Hibor, rose to 200 per cent Tuesday afternoon after hitting 66.815 per cent for overnight funding on at the 11.15am fixing , a record high since the Treasury Market Association launched the fixing in 2013. The fixing shot up 10 percentage points on Monday to 13.396 per cent.

One week yuan borrowing costs shot up to 33.791 per cent, two weeks to 28.342 per cent, one month to 15.736 per cent, two months to 12.17 per cent, and three months at 10.42 per cent.

Offshore yuan strengthened as a result of the PBOC actions, rising to 6.5650 Tuesday afternoon, up 0.12 per cent from Monday’s close, which gained 1.48 per cent from the previous session.

The two day advance more than offset last week’s 1.75 per cent devaluation, which saw the currency hit a record low of 6.7511 per US dollar on Thursday.

Jasper Lo Cho-yan, a director of Tung Shing Futures, said currency traders were struggling to access offshore yuan Tuesday as some mainland-based banks refused to sell the currency.

“Whenever there was a sell order of the offshore yuan, traders rushed to grab it,” he said.

Joseph Tong Tang, executive director of SHK & Co, said while the PBOC has not announced its buying, market participants f believe the PBOC intervention was intended to prop up the yuan and punish currency speculators.

“The currency speculators who short sell the yuan would need to borrow the yuan in the interbank market. As such, a squeeze of interest rate would add their costs substantially. Some would prefer to wind up their short position on yuan. This is how the PBOC drives away the currency speculators,” he said. “This is a strategy commonly used by central banks. But it also hurts the end users who need to pay high costs to get yuan to settle trade or for investment.”

Lo said the PBOC would continue to intervene to support the yuan in London and US trading last night, while the battle with speculators are likely to last for as long as a year.

“The fundamentals of the yuan remain weak due to the expectation of an economic slowdown. The yuan is likely to go down further and the PBOC would find it very expensive and difficult to fight against market forces,” he said.

The yuan exchanged in Shanghai traded at 6.5760 yesterday afternoon, weaker by 0.08 per cent, after rising 0.39 per cent on Monday. The spread between onshore and offshore yuan narrowed to 91 basis points, against a record high of 1,400 basis points last Thursday.

The fundamentals of the yuan remain weak due to the expectation of economic slowdown
Jasper Lo, Tung Shing Futures

Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia wrote in his blog on the exchange website that the volatilities of yuan has brought opportunities to Hong Kong. The yuan futures trading at the HKEx has increase to a record high open interest at 29,352 contracts yesterday, up from 3,572 on January 4.