'Murderous' yuan rate deals jolt to HK currency-hub role

The overnight yuan Hong Kong Interbank Offered Rate climbed to 66.82 per cent on Jan 12, 2016.
The overnight yuan Hong Kong Interbank Offered Rate climbed to 66.82 per cent on Jan 12, 2016.PHOTO: REUTERS

HONG KONG (BLOOMBERG) - An unprecedented surge in the cost of borrowing in yuan in Hong Kong raises questions about the outlook for the city's role as the biggest offshore hub for the Chinese currency.

The overnight yuan Hong Kong Interbank Offered Rate climbed 53 percentage points to 66.82 per cent on Tuesday - a side-effect of a campaign by the People's Bank of China to curb arbitrage between the offshore and onshore rates for the currency.

"A 66 per cent rate is murderous for others being swept up in this who are not speculating,"said Michael Every, head of financial markets research at Rabobank Group. Central banks "usually win a round like this, but lose in the end," he added.

As Hong Kong's Chief Executive Leung Chun Ying prepares for his policy address on Wednesday, one topic hanging over the city is the outlook for the yuan business amid speculation that the currency could weaken further. The city's yuan deposits have fallen from a record reached in December 2014. Issuance of Dim Sum bonds - yuan-denominated notes sold outside of China - fell 38 per cent last year.

Analysts are assessing how quickly yuan loan rates may return to more normal levels in Hong Kong.

"Given that the Chinese have achieved their target of narrowing the convergence between offshore and onshore, we should see the end of higher rates," said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd. "It's a short-term move. I don't see this as a start of a crisis, at least for now."

The Hong Kong Monetary Authority on Monday said demand for liquidity support from banks increased after the interbank yuan rate jumped to 13.4 per cent. The city's de facto central bank didn't immediately comment Tuesday.

The jump in the yuan rate reflects a deliberate move by the PBOC to enforce capital controls to align the yuan's onshore and offshore values, said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA.

For Hong Kong's economy, which relies on banking as a pillar for growth, the squeeze is potentially not good news, Xia said. "This city is highly dependent on its financial sector, so if we see a shrinkage of the offshore market that is definitely not good for the real economy," he said.

At least 31 Hong Kong-listed companies have reported since August that a weaker yuan has hurt their profit, the Hong Kong Economic Journal reported on Monday.