PBOC boosts weekly injections as yuan climbs amid stability bets

BEIJING (BLOOMBERG) - China's central bank boosted its cash injections to a five-month high, fueling speculation that it is looking to steady the nation's financial markets.

The People's Bank of China pumped in a net 385.1 billion yuan (S$78.5 billion) this week, the biggest additions since April, as the overnight money-market rate climbed before a series of holidays.

The yuan advanced in both the onshore and overseas markets amid bets policy makers are propping up the currency before it enters the International Monetary Fund's reserves on Oct. 1. China's financial markets are closed Thursday and Friday, and for the week through Oct. 7. Signs that the authorities are in the market have been bolstered this week, with state-run lenders seen selling dollars and the one-week offshore yuan loan rate spiking to the highest since January.

The PBOC set the currency's daily fixing, which limits onshore moves to 2 per cent on either side, at a level stronger than expected on Wednesday, according to HSBC Holdings Plc. The yuan has come under increased pressure because of the chances of a Federal Reserve interest rate increase this year. The US central bank meets next week.

"If the tightness persists, the central bank will continue to boost cash supply through open-market operations," said Chen Peng, analyst at Fortune Securities Co. "By using different terms of contracts, it can ensure liquidity demand for various terms was met."

The cost of borrowing yuan in Hong Kong surged the most in eight months amid speculation China's central bank is intervening to discourage bearish bets on the currency. The overnight Hong Kong Interbank Offered Rate climbed 5.32 percentage points to 8.16 per cent, according to Treasury Markets Association data. The one-week rate rose 5.23 percentage points to 10.15 per cent, the highest since January.

"The yuan Hibor was high partly because of seasonal demand and partly because the Hong Kong Monetary Authority doesn't appear too keen on providing liquidity," said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. "Also, with the offshore yuan trading precariously close to 6.70 ahead of the upcoming holidays, the PBOC doesn't mind seeing short-end rates higher to deter speculators. It is all preempting holiday and the Fed decision next week. If Fed holds as expected and the dollar is softer, the offshore yuan rates will quickly come off."

The offshore yuan advanced 0.2 per cent to 6.6752 a dollar as of 4:08 p.m. in Hong Kong, while the onshore yuan strengthened 0.1 percent. The one-day repo rate was little changed at 2.15 per cent in Shanghai, according to a weighted average, after rising to an almost seven-month high of 2.17 per cent before Wednesday's open-market operations.