Surging yuan Hibor highlights tight liquidity

The overnight yuan Hibor rate surged by 522 basis points in Hong Kong, making it more costly to set up trades that benefit from the currency’s depreciation

PUBLISHED : Monday, 05 December, 2016, 2:27pm
UPDATED : Monday, 05 December, 2016, 10:57pm

The borrowing cost of yuan in the offshore market in Hong Kong surged on Monday, highlighting the significantly tightened liquidity after China’s central bank made moves to moderate the yuan’s depreciation.

The overnight Hong Kong Interbank Offered Rate of the yuan (CNH Hibor) surged by 522 basis points to hit 12.3813 per cent, the highest level since September 13th. The rate has climbed for six days in a row. The 7-day CNH Hibor rate also rose 203 basis point to hit 9.0792 per cent, together with the rates of all other terms.

Meanwhile, in the onshore market, the 3-month Shanghai Interbank Offered Rate (Shibor) rose for the 33rd consecutive day, up 2.03 basis points to 3.0889 per cent, while the rates of other terms have also been in a steady rise recently.

Analysts believe the surge is attributable to the tightening liquidity of yuan after Chinese authorities made moves to shore up the yuan, which has faced rounds of accelerated depreciation since mid November.

The central bank’s approach has been to increase borrowing costs in the money markets, by releasing more long-term liquidity with higher borrowing costs while tightening short-term liquidity with lower borrowing costs through open market operations as well as non-traditional tools such as the medium-term lending facility (MLF).

Last week, the Chinese central bank limited the amount of yuan that non-financial Chinese companies’ lending in yuan to overseas companies to the equivalent of 30 per cent of the owners’ equity, a cap for the first time in more than two decades to stem the yuan’s outflows.

The surge of CNH Hibor will discourage short yuan trades by raising their borrowing cost.

“The CNH Hibor could go even higher given the mounting depreciation pressure on the yuan,” said Hong Hao, the chief strategist of Bocom International in Hong Kong.

“The tightening situation could last for a while, at least until the depreciation pressure eased a little bit,” said Hong.

“But overall, the liquidity in the year end is expected to be very tight,” said Hong.

“I think February next year will be a critical time to see for the yuan, as Donald Trump will walk into the office by then and Chinese spring festival will also come around that time when typically the PBOC will ease liquidity to meet increasing demand,” said Jeremy Cook, the chief Economist and Head of Currency Strategy at World First,

He added that renewed pressure on the yuan could pick up in January when its likely that Chinese citizens will rush to use up their refreshed annual US$50,000 quota on foreign exchange.