(From Caixin Online)
The People’s Bank of China supports the country’s currency and fends off short sellers in the world’s largest overseas yuan market
By staff reporters Li Yuqian and Yang Gang
Wild fluctuations for yuan-based interbank lending rates as well as onshore-offshore yuan spreads in Hong Kong began in January and could continue indefinitely while the People’s Bank of China defends its currency against short sellers.
The bank’s commitment to stabilizing the yuan’s value on offshore markets, of which Hong Kong is the oldest and largest, has “substantially raised the cost of short selling the currency” since the beginning of the year, said Yang Yuting, a senior economist with the Hong Kong arm of Australia and New Zealand Banking Group Ltd.
The Hong Kong Inter-bank Offered Rate (Hibor) – an interest rate banks pay for overnight borrowing from each other – hit record highs and reflected what Yang called “an extreme dry spell” for yuan liquidity in the former British colony.
The overnight Hibor for yuan loans jumped from what was already an unusually elevated 13.4 percent on January 11 to a record 66.8 percent the next day, before cooling off to its usual single-digit levels.
Interest rates for seven- and 14-day yuan loans between banks in Hong Kong also soared to unprecedented heights in January.
Meanwhile, the difference between the yuan’s onshore and offshore exchange rates widened to more 1,300 basis points on January 6, compared to an average of about 700 in December and 300 basis points in November, making offshore yuan significantly cheaper than its mainland equivalent.
By mid-January, though, central bank measures had triggered a reversal, leaving yuan traded in Hong Kong relative to the U.S. dollar briefly more expensive than on the mainland’s interbank foreign exchange market.
Yang said January was likely just the beginning for a period of powerful policy intervention by Beijing.
“The central bank has plenty of ammunition to carry out intervention,” he said. “Any small steps it takes will make waves in Hong Kong’s forex market.”
Beijing’s policy steps are also affecting Hong Kong’s financial system, Tao Dong, chief analyst at Credit Suisse Asia, said in a January 21 report. For example, he said, investors prevented by the central bank from betting on a weaker yuan had turned their attention to short selling Hong Kong dollars, putting pressure on the city’s stock exchange and real estate markets, and raising borrowing costs.
Hong Kong investors of all stripes would do well to prepare for continued volatility for the city’s offshore yuan market through 2016, Charles Li, chief executive of the Hong Kong Exchanges and Clearing Ltd., said in a blog posted on January 12.
And the yuan’s exchange rate against the U.S. dollar may fluctuate more than many expected, Li said. Fund managers, commercial investors and stock market players face a bumpy road ahead, he wrote, so “fasten your seat belt.” Read more