China’s forex interventions spook overseas investors

While China may be succeeding in boosting the yuan and warding off capital outflows, it is threatening to discourage overseas investors amid efforts to open up its financial markets

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China’s bond market is the world’s third largest behind the US and Japan. But overseas ownership remains at just only 1.25 per cent, considerably lower than the average 20-30 per cent generally held in other key emerging markets, clearly illustrating an ongoing wariness over China’s capital controls to repatriate proceeds out of the mainland. Photo: Reuters

Karen Yeung

Karen Yeung joined the Post in 2017 after more than 15 years' experience on global newswires in Hong Kong and Shanghai.

Published: 1:22pm, 2 Jun 2017Updated: 10:03pm, 2 Jun 2017

China’s crackdown on bearish yuan speculators has come at a cost.

While it may be succeeding in boosting the value of the currency and warding off capital outflows, it is also threatening to discourage overseas investors, amid efforts to open up its financial market.

It is now being strongly argued by many that this week’s sharply higher yuan interbank rate in Hong Kong was engineered by Chinese state-owned banks, who are among the primary liquidity providers for offshore yuan in the city.

The overnight CNH Hibor rate, a gauge of yuan funding costs between banks in Hong Kong, spiked from 5.35 per cent on Tuesday to 21.1 per cent on Wednesday, and subsequently to 42.8 per cent on Thursday, making the cost of borrowing yuan funds to traders who convert the proceeds to buy dollar-denominated assets, to soar through the roof, forcing many out of their positions.

In response to the liquidity squeeze, the yuan spot rate in the currency market has climbed to its strongest level in seven months – but it’s still just 2 per cent higher this year, and is underperforming the region. Photo: Reuters

The move, along with last week’s decision by the People’s Bank of China to tweak its formula in calculating the daily yuan reference rates, seems aimed squarely at crushing speculators that are bearish on the outlook of the yuan, and sending out a signal that the country will not tolerate a weakening yuan.