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

PUBLISHED : Wednesday, 13 January, 2016, 12:56pm
UPDATED : Monday, 27 June, 2016, 11:51am

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.

Offshore yuan was trading at 6.5736 on Wednesday evening, stronger by 0.05 per cent. The gain this week has wiped out the 1.75 per cent devaluation last week. Offshore yuan is now trading at a premium of 4 basis points above onshore yuan, a turnaround from last Thursday, when it was trading at a record discount of 1,400 basis points.

“But the battle between the PBOC and the currency speculators won’t just end here. We are going to see more of these from time to time in the next few months,” said Joseph Tong Tang, executive director of brokerage SHK & Co.

Joey Chew, Asian forex strategist of HSBC, said the PBOC’s intervention means “China is sending a strong message to speculators and trying to stabilise RMB depreciation expectations”, adding “high volatility is the theme for the RMB this year”.

But Rabobank analysts warned in a note that the intervention would have an adverse effect as “it’s not foreign speculators who are the problem, it’s the local market that will determine the outcome of this fight, and capital outflows are only going to accelerate”.