Borrowing rate for yuan in HK plunges

An employee at a currency exchange store counts one-hundred yuan banknotes in Hong Kong, China, on Jan 12, 2016.
An employee at a currency exchange store counts one-hundred yuan banknotes in Hong Kong, China, on Jan 12, 2016.PHOTO: BLOOMBERG

HONG KONG • The cost of borrowing the Chinese currency in Hong Kong yesterday dropped from record highs, a day after intervention in the offshore yuan market pushed up the interest rate on one-day loans to over 65 per cent.

The overnight Hong Kong interbank offered rate (Hibor) fell 58.5 percentage points to 8.31 per cent, having hit an unprecedented 66.82 per cent on Tuesday, after the People's Bank of China (PBOC) purchased yuan in the city to drive out speculators.

That erased the gap between the onshore and offshore rates for the first time since October, with the currency in Hong Kong trading at a premium yesterday.

"Once speculative pressure on the offshore yuan eases, interest rates will fall towards more normal levels," said Mr Eugene Leow, Singapore-based rate strategist at DBS Bank. "Still, the offshore yuan rates are likely to trade above their onshore counterparts for the foreseeable future as there remains a weakening bias for the yuan versus the US dollar."

The so-called Hibor rate rose sharply on Monday and Tuesday after state-owned Chinese banks were seen rushing to buy the offshore yuan. That effectively dried up supply of offshore yuan in Hong Kong, its main trading hub where the value floats freely.

The surge made it prohibitively expensive to short the yuan, or borrow to bet it would fall.

On Tuesday, the market rate for yuan borrowing reached as high as 110 per cent, say traders, who interpreted the buying by PBOC as a signal that the central bank was trying to close a widening gap with the more tightly controlled onshore currency.

The PBOC has been intervening in the offshore market via state banks this week to crack down on speculators, and limit the supply of yuan overseas, driving up Hibor.

"Measures to prevent sharp yuan depreciation such as intervention and outflow curbs will likely be temporary, but policymakers may want to keep borrowing costs for the currency relatively high in Hong Kong in the near term as it seeks to keep the onshore-offshore gap small," said Ms Irene Cheung, currency strategist at Australia and New Zealand Banking in Singapore.

The offshore yuan yesterday rose 0.14 per cent to 6.5750 a dollar in Hong Kong, according to prices compiled by Bloomberg. That takes its five-day advance to an unprecedented 2.1 per cent.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 14, 2016, with the headline 'Borrowing rate for yuan in HK plunges'. Print Edition | Subscribe