Offshore yuan gains as China steps up defence of its currency

An employee counts 100-yuan banknotes at a bank in Lianyungang, China.
An employee counts 100-yuan banknotes at a bank in Lianyungang, China. PHOTO: AFP

(BLOOMBERG) - The offshore yuan strengthened on Monday (Jan 18), building on its biggest weekly gain since October, after China stepped up efforts to curb speculation against its currency beyond its borders.

The People's Bank of China will impose reserve-requirement ratios on yuan deposits held on the mainland by offshore participant banks from Jan 25, according to people familiar with the matter. Premier Li Keqiang on Friday pledged a "stable" exchange rate, and said the country had no intention of stimulating exports through competitive currency devaluation.

The central bank strengthened its daily reference rate for the yuan by 0.07 per cent on Monday, the biggest gain in four weeks.

"The offshore yuan strengthening is likely due to news of required-reserve ratios," said Mr Khoon Goh, a senior currency strategist at Australia New Zealand Banking Group in Singapore. If the news is confirmed, it "shows the authorities are trying to make it more difficult for speculators in the offshore yuan market to short the currency. Near-term it will create stability, but there's still downward pressure on the currency due to slowing growth".

The yuan traded in Hong Kong rose 0.41 per cent to 6.5868 a US dollar as of 9.31am local time, after gaining 1.05 per cent last week, according to data compiled by Bloomberg. It gained 0.07 per cent to 6.5792 in onshore trading in Shanghai.

The PBOC repeatedly bought the currency in Hong Kong last week, sending interbank borrowing costs to an all-time high, in an effort to squeeze out speculators and reduce the gap between the yuan's exchange rates at home and abroad. The nation's foreign-exchange regulator was also said to have verbally instructed some onshore banks to stop yuan leaving the mainland and reduce offshore liquidity.

The offshore yuan erased its discount to the Shanghai rate on Jan 12 for the first time since October amid central bank intervention. The central bank's foreign-exchange assets tumbled by the equivalent of 708 billion yuan (S$155.2 billion) in December to 24.85 trillion yuan, data showed on Friday. That compares with a drop of 2.21 trillion yuan for the whole of last year and is similar to the US$107.9 billion (S$155.3 billion) slide in the nation's foreign-exchange reserves that was previously reported for December.

The nation's fourth quarter and full-year gross domestic product report will be released on Tuesday at 10am in Beijing. Economic growth for year was probably 6.9 per cent, the slowest in more than a quarter century, according to a Bloomberg survey of economists as of late Friday.