Rise in yuan borrowing costs points to PBOC intervention

The overnight Hibor hit a seven-month high, adding to signs the Chinese central bank is propping up the currency

PUBLISHED : Thursday, 08 September, 2016, 3:30pm
UPDATED : Thursday, 08 September, 2016, 10:59pm

The cost of borrowing yuan in Hong Kong soared to its highest level in seven months on Thursday, fueling speculation that the Chinese government has intervened in the offshore foreign exchange market to curb short selling of the currency.

The overnight Hong Kong Interbank Offered Rate for the yuan (Hibor), a major gauge of liquidity in the offshore yuan market, soared to 5.45 per cent on Thursday from 1.57 per cent the previous day, according to Treasury Markets Association data. That’s the highest level since February 19 this year.

The one-week Hibor rose 210 basis point to 4.06 per cent.

The surging borrowing costs have strengthened the belief among traders that the central bank may have stepped in to slow the yuan’s decline and discourage bearish bets, as expectation of further losses have intensified .

The People’s Bank of China (PBOC) may have already tightened its control over liquidity in the offshore market in a bid to contain the negative expectation around the currency, according to Mizuho Bank.

Hong Hao, managing director and chief strategist at the Bocom International, agreed, saying: “The surge of Hibor today could be the result of government intervention, as the depreciation pressure for the yuan is obviously stronger these days.

With the yuan’s borrowing costing at this level, the cost for short selling yuan will be very high
Hong Hao, managing director and chief strategist, Bocom International

“With the yuan’s borrowing costing at this level, the cost for short selling yuan will be very high.”

The central bank’s intervention at the beginning of the year drove yuan Hibor to record highs, dealing a hefty blow to short sellers.

The PBOC has previously asked state-owned banks to refrain from lending excess yuan in Hong Kong, pushing up hibor and increasing the cost of short selling the currency.

The yuan was widely expected to depreciate after the G20 meeting as the government withdrew its support of the currency, said Ming Ming, the chief fixed-income strategist at CITIC Securities. It’s been speculated that the Chinese government took steps to prop up the currency during the event, as pressure on the yuan intensified following the Federal Reserve’s recent signals that an interest rate rise might be on the way.

The latest data on China’s foreign exchange reserves would also tend to indicate central bank intervention. The reserves fell by $15.89 billion last month to $3.185 trillion, according to figures issued on Wednesday by the People’s Bank of China (PBOC), which is the lowest level since December 2011.

China’s exports continued their downward trend, falling 2.8 per cent year-on-year in August in US dollar terms, heaping additional pressure on the yuan.

Offshore yuan in Hong Kong was at 6.6728 against the US dollar as of 5.52 pm on Thursday, barely changed from previous day.