Yuan loan rates jump to records in HK as China central bank narrows gap

A bank employee counting 100-yuan banknotes.
A bank employee counting 100-yuan banknotes. PHOTO: AFP

HONG KONG (BLOOMBERG) - The cost of borrowing yuan in Hong Kong surged to records for all contracts on Tuesday (Jan 12) as China's efforts to prop up its exchange rate and restrict capital outflows soaked up supplies of the currency.

The city's benchmark rates for loans ranging from one day to a year rose to levels unprecedented since the Treasury Markets Association started compiling the fixings in June 2013. The overnight Hong Kong Interbank Offered Rate climbed 53 percentage points to 66.82 per cent on Tuesday, while the one- week rate jumped 22.6 percentage points to 33.8 per cent.

The yuan traded in Hong Kong's free market rose as much as 0.7 per cent, temporarily erasing a gap with the Shanghai exchange rate that widened to a record 2.9 per cent last week.

Betting against the yuan will fail and calls for a large depreciation are "ridiculous" as policy makers are determined to ensure the currency's stability, Han Jun, the deputy director of China's office of the central leading group for financial and economic affairs, said at a briefing in New York on Monday.

"Its a conscious effort to make funding costs high for speculators," said Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia. "The Hong Kong Monetary Authority is notably absent from the market. They're trying to help the PBOC achieve its objective of converging the yuan spot rates."

The offshore yuan interbank interest rates have gone up, suggesting liquidity is tight, the Hong Kong Monetary Authority said in an e-mail on Monday. It added that it has provided liquidity support to lenders. The People's Bank of China has repeatedly intervened in the offshore yuan market since Tuesday to crack down on speculators, according to people familiar with the matter.

Yuan deposits in Hong Kong declined 14 per cent in the first 11 months of last year to 864 billion yuan (S$188.9 billion) at the end of November.

"Yuan depreciation expectations are preventing investors from holding the currency, leading to a drop of deposits in Hong Kong," said Albert Leung, a Hong Kong-based rates strategist at Nomura Holdings Inc. "The PBOC's suspected intervention in the offshore currency market further tightened the liquidity. Yuan interest rates are expected to remain highly volatile in the next couple of days."