Growing demand spurs borrowing costs of offshore yuan in Hong Kong

Borrowing costs of offshore yuan in Hong Kong surged to their highest levels in a year last week as banks became more reluctant to part with their money in the run-up to the end of the half-year and demand for funds increased with the opening up of more channels for onshore companies to tap the offshore yuan pool.

The overnight Hong Kong interbank offered rate for offshore yuan rose to the highest level since June last year to 4.589 per cent last Monday. The three-month rate hit 2.8985 per cent the following day, the highest since the middle of August.

"This is a liquidity management issue. As it is approaching the half-year end, [yuan] providers have become more conservative in lending … Many banks are due to publish half-year results. It is natural that every player wants to see a nicer ratio [on the balance sheet]," said Becky Liu, senior rates strategist of global research at Standard Chartered Bank.

The big players, such as the three note-printing banks, were liquidity providers while mainland banks and some foreign lenders that had a smaller offshore yuan balance sheet were net borrowers, Liu said.

Another reason for the pressure on rates is the increasing number of channels for onshore companies to borrow offshore, boosting the demand for offshore funds.

Last week, the People's Bank of China said it would allow Singapore-based banks to lend yuan to the Suzhou Industrial Park in eastern China. The Singapore operations of Bank of China, Industrial and Commercial Bank of China and Standard Chartered have lent a combined 100 million yuan (HK$125.7 million) to firms based in the industrial township over the past week.