BEIJING • China's efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most in a year as traders scrambled for a currency that is becoming increasingly scarce outside the nation's borders.
The yuan gained 0.5 per cent at 6.48pm in Hong Kong, taking its two-day move to 1.8 per cent. It is poised it for its biggest gain since 2010. The overnight deposit rate rose as high as a record 100 per cent and the spread between the offshore and onshore exchange rates also reached the widest since 2010.
Investors are cutting bullish positions in the US dollar after the report underscored China's determination to support the yuan, Societe Generale said.
Beijing policymakers recently undertook a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens' conversion quotas and stricter requirements for banks reporting cross-border transactions.
"Given the recent capital controls, the channels for domestic institutions and retails to bring out onshore cash to the offshore market have also been tightened," said Ms Becky Liu, a rates strategist in Hong Kong at Standard Chartered. "There is a lack of supply of yuan liquidity."
In other signs of yuan scarcity, HSBC Holdings raised its three- month yuan deposit rate from 1.8 per cent to 2.85 per cent, according to the Oriental Daily, while the cost of borrowing yuan surged overnight in Hong Kong by 21.4 percentage points, the most since January last year, when the authorities choked the yuan supply, hitting out at speculators betting on declines.
"We know the capital controls aren't working because that's why they're having to raise the overnight deposit rate so aggressively by the (People's Bank of China), which is still basically the guiding hand in the offshore yuan market," said Mr Michael Every of Rabobank Group in Hong Kong told Bloomberg. "It's an incredibly aggressive tactic."
High short-term funding costs, which will continue to trend higher, could dissuade significant short yuan positions from being added in the near term, according to a note from Societe Generale strategists led by Jason Daw yesterday.
A rebounding currency would alleviate pressure on the Chinese authorities battling to curtail capital outflows, after an annual US$50,000 (S$71,700) quota for citizens to buy foreign exchange reset on Jan 1 and the imminent inauguration of Donald Trump as US president lifts the US dollar.
Investors have been watching for the yuan to break the psychologically key level of 7 against the greenback for the first time since 2008.
In Hong Kong, where it trades freely, the yuan strengthened by 0.6 per cent, to 6.8264 to the US dollar, according to Thomson Reuters - its second consecutive day of sharp gains.
Within mainland China, where the People's Bank of China limits yuan movement to 2 per cent above or below a level that it sets daily, the yuan rose by 1 per cent to close at 6.8817 to the US dollar - its strongest since Dec 8.
The offshore yuan's strength will be short-lived because the Hong Kong Monetary Authority may add supply of the currency to lower funding costs and the US dollar could rally, said Dr Andy Ji, a currency strategist at Commonwealth Bank of Australia.
The onshore exchange rate will decline by 3.6 per cent to 7.15 per US dollar by the end of this year, according to the median estimate in a Bloomberg survey.
