NewShanghai, Hong Kong interbank yuan rates spike ahead of National holidays

The doors for arbitragers who focus on working between the onshore and offshore yuan rates have reopened as overnight onshore interbank offered rate (SHIBOR) and 7-day offshore rates (CNH HIBOR) spiked late last week as trades thinned ahead of the National Day holidays.

Data from Wind showed overnight SHIBOR spiked by 8.2 basis points to 1.9890 per cent as the mainland closed shop for the Golden Week holiday break. In Hong Kong, CNH HIBOR also regained a high of 6.691 last week. The CNH HIBOR is up from the trough it touched at 2.5180 under the People's Bank of China intervention; but still substantially lower than the peak of 10.095 per centit reached on August 25 when yuan liquidity in Hong Kong came under distress.

Instead of foreign hot money, more researchers now point to corporate punters as the most likely culprits in contributing to the two-way flows. Experts say their activities have been reinforcing the depreciation pressure and disrupted the interbank market - so the PBOC was right to step in and intervene.

"The cross-border arbitrage of yuan is still a gray area under the current system of forex regulations," Jiang Chao, head of fixed income research at Haitong Securities, said.

Jiang noted punters are still relying on a few main means to straddle their trades. Some take liberties with the freedom provided by their non-resident accounts (NRA) or free-trade accounts. This is done by purchasing yuan onshore to sell outside China, purchasing yuan with accounts registered in the free-trade zones to accounts registered in the areas immediately outside those zones.

While the impact brought about by free-trade accounts is relatively minimal, NRA activities are seen reinforcing selling pressures within the mainland, and expanding net outflows of dollars from China.