Hong Kong’s offshore yuan market under strain as PBOC targets currency bears

PUBLISHED : Friday, 06 January, 2017, 1:42pm
UPDATED : Friday, 06 January, 2017, 2:14pm

The Hong Kong Monetary Authority (HKMA) is likely to exhaust its daily quota for the offshore yuan market for a second consecutive day, even though borrowing costs threatened to breach a one-year high, in a clear sign Beijing is continuing to drain liquidity to deter traders from betting against the currency

The HKMA’s 10 billion yuan quota for intra-day funding had nearly reached its limit on Friday morning, according to Reuters data.

By 11 am local time, 9.95 billion yuan of the quota had been used up. The quota was also used up yesterday.

The overnight borrowing rate for offshore yuan is breaking records in Hong Kong, as liquidity tightens and the currency’s short sellers rush to square their short positions amid intensifying efforts by Beijing to defend the currency.

Hong Kong’s overnight CNH Hibor, the official benchmark for interbank borrowing costs of offshore yuan, was set at 61.33 per cent on Friday morning, almost twice yesterday’s fixing of 38.33 per cent.

It is close to a historic high of 66.82 per cent on January 12 last year, when the PBOC targeted offshore yuan bears by pushing up the costs of shorting the currency.

The actual overnight offshore yuan borrowing cost reached 110 per cent during Thursday night trading, and kept rising on Friday morning, according to traders.

The central bank’s apparent intervention drove the offshore yuan in Hong Kong up 1.18 per cent on Thursday to an intraday high of 6.7845 per US dollar before it staged a turnaround, easing back down to 6.8401 on Friday morning.

Jiuzhou Securities chief economist Deng Haiqing warned that the People’s Bank of China should be cautious when intervening to defend the currency rate.

“Seven (yuan against the US dollar) seems an important level, and taking measures to keep yuan above this level helps short-term stability. However, if the PBOC took measures but later lost the battle, it would lose credit, which will add pressure to yuan depreciation,” he said.

The HKMA rolled out the intra-day repurchase facility to meet increasing demand for the Chinese currency ahead of the Shanghai-Hong Kong stock connect scheme in 2014.