Offshore yuan borrowing cost goes negative for the first time

PUBLISHED : Thursday, 31 March, 2016, 1:45pm
UPDATED : Monday, 27 June, 2016, 11:51am

Yuan borrowing cost slipped into negative territory for the first time on record on Thursday as the currency notched up its biggest quarterly gain in four years.

The recent rally in yuan has forced short-sellers to wind up their positions, boosting liquidity in the offshore yuan market. This, in turn, pushed down the overnight interest rate on offshore yuan (CNH) Hong Kong interbank offer rate (Hibor) to -3.725 per cent. The negative interest rate means banks providing yuan loans in the interbank market are paying an interest to those that are borrowing.

This reversal of banking norms in the offshore market came as offshore yuan rose to a one-week high of 6.4690 on Thursday morning, up 0.05 per cent, or 35 basis points. from Wednesday. That took its advance for the current quarter to 1.47 per cent – highest in four years.

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Hang Seng Bank executive director Andrew Fung expressed surprise at the negative Hibor.

“It basically shows the offshore yuan market is full of liquidity. This may be related to the recent rally of the yuan, with short-sellers closing their positions,” Fung said.

The yuan has had a a bumpy ride in the first quarter. It depreciated against the US dollar by 2 per cent in the first week of the year, with some hedge funds vowing to attack the Chinese currency. This prompted an intervention by the People’s Bank of China, which squeezed up CNH borrowing costs by setting the reference rate of the yuan to the US dollar sharply higher, driving the speculators away.

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The trend reversal in March, which saw the yuan go from strength to strength, came in step with a weakening US dollar as the US Federal Reserve indicated that it is in no hurry to raise interest rates.

The yuan’s gains in the past month are its biggest in a year, but analyst still believe the rally is unlikely to continue. The currency continued to rise on Thursday after the People’s Bank of China set its reference rate against the US dollar at 6.4612, the strongest so far this year, up 0.35 per cent, or 229 basis points. from the previous day.

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Onshore yuan in Shanghai once hit a fresh weekly high of 6.4641, up 0.01 per cent, or 7 basis points.

With that, both onshore and offshore yuan notched up the biggest monthly gains in a year. On a quarterly basis, onshore yuan has strengthened 0.41 per cent, or 267 basis points, in the first three months – its first quarterly gain since June last year.

The rally has strengthened as the US dollar weakened after a dovish speech by Federal Reserve chair Janet Yellen on Tuesday night hinting at a slow pace of interest rate hikes.

Major currencies like the Japanese yen and the euro also extended their rally on Thursday.

“Yuan’s rebound is purely due to the weakening of the US dollar, rather than any good news from China’s economy,” said Jasper Lo, chief executive of King International, “ I don’t think the rally can continue in April as China’s fundamentals are still weak.”

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On Friday, Beijing will announce the official manufacturing purchasing managers’ index (PMI) data for March while the US government will post its non-farm employment data for the month.

The yuan will be under pressure in the short term given the US will deliver quite a strong employment data while China’s PMI may still be sluggish, Lo said.