HK offshore yuan interbank rates hit record highs on China central bank interventions

SHANGHAI/HONG KONG (REUTERS) - Hong Kong Interbank Offered Rates for offshore yuan (CNH HIBOR) all hit record highs on Monday (Jan 11), as a combination of intervention by China's central bank and arbitrage drained offshore yuan supply.

The overnight rate spiked to over 13 per cent on Monday, up from 4 per cent on Friday.

All are much higher than the onshore rates quoted in Shanghai (SHIBOR), where the overnight rate, while up from previously, is still below 2 per cent.

Analysts said that the PBOC's intervention by buying up offshore yuan and selling US dollars in order to support the weakening offshore yuan was draining liquidity and behind the spike.

"PBOC's intervention partly drained the liquidity in the CNH market and there is no actual policy and barriers to stop capital outflows. Meanwhile there is no channel to provide liquidity to the offshore market," said James Lee, a forex strategist at Barclays in Singapore.

Companies rushing to borrow offshore yuan, which is cheaper than in it is onshore, to repay onshore debts also was contributing to the spike, another trader said.

The onshore yuan has slid over 6 per cent since August, sparking investor fears that Beijing is preparing for a far deeper devaluation in the yuan.

That has caused markets to price the offshore currency at a deep discount to the onshore version, as wide as 2 per cent on some days, offering investors the opportunity to arbitrage the rate diffference by paying off onshore debt with offshore yuan.

The offshore yuan was trading 1.2 per cent weaker than the onshore spot in early afternoon, at 6.6641 per dollar compared to 6.5832 onshore.

Yuan accumulation in the offshore market lost momentum in 2015 after the currency's largest yearly loss on record against the dollar.

Yuan deposits in Hong Kong stood at 864.2 billion yuan (S$190.1 billion) in November, a bit higher than 854.3 billion yuan a month earlier but still hovering around two-year lows.

The International Monetary Fund, which will include the yuan in its reserve currency basket starting in October, reportedly mentioned the wide spread between onshore and offshore yuan levels at the weekend and was said to have discussions with Chinese officials on the subject. That has strengthened market expectation that the central bank will conduct more interventions.