Currency crossfire: Yuan borrowing cost down as PBOC tames offshore yuan market in Hong Kong

Borrowing costs for offshore yuan in Hong Kong plunged on Wednesday after spiking in the past two days as the People’s Bank of China (PBOC) continued to fend off attacks by currency speculators but analysts warned the battle is far from over.

The overnight Hong Kong interbank rate for offshore yuan, or CNH Hibor, was down to 3 per cent on Wednesday afternoon after it was fixed at 8.31 per cent in the morning. Wednesday’s rate was a drastic improvement from the 200 per cent at one point on Tuesday afternoon after the CNH Hibor was fixed at 66.815 per cent on Tuesday morning, its highest ever. The fixing began the week shooting up 10 percentage points on Monday to 13.396 per cent from 4 per cent on Friday.

Tommy Ong, managing director of treasury and markets at DBS Hong Kong, said the PBOC has completed its intervention, guiding the interest rate back to normal.

“The offshore yuan has bounced back to a level higher than onshore yuan and the spread has narrowed down. The PBOC has no further need to intervene in the market,” Ong said. “However, if the speculators attack the yuan again, the PBOC is likely to intervene again,” he said.

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

The central bank began to intervene on Monday, when, currency traders said, it asked all mainland China-based banks not to sell any yuan and buy the currency. This quickly dried up liquidity in the Hong Kong offshore yuan market and squeezed interest rates higher, adding to the cost for speculators taking short positions in the currency.