Short-term borrowing rates in the Chinese yuan surged to their highest in a month in Hong Kong Tuesday, as banks hoarded cash ahead of China’s long holiday and the Chinese central bank’s recent intervention in the offshore market dried up liquidity.
The rate increase comes amid recent China data that signal a weakening economy, and as the value of the yuan has strengthened against the U.S. dollar in both onshore and offshore trading. Traders said the People’s Bank of China has been intervening in the offshore market, while a Wall Street Journal report in August revealed it had intervened in the onshore market.
In a fresh sign of intervention offshore, the yuan abruptly strengthened to 6.34 against the dollar late Tuesday in Asia. For most of the day, the currency had been relatively calm, hovering around 6.36 to the dollar for most of the day after strengthening from roughly 6.4 per dollar last Friday.
“Chinese banks have been buying [the yuan] aggressively this evening,” said one senior trader at a major local bank.
In Shanghai, the yuan closed at 6.36 against the U.S. dollar Tuesday, slightly stronger than 6.37 late Monday.
Earlier Tuesday, the overnight rate that banks in Hong Kong charge each other to borrow the yuan jumped to 8.73% from 3.38% Friday, according to the offshore fixing rate—a benchmark based on reference rates contributed by local banks and compiled by the Treasury Markets Association, the city’s banking industry group.
Hong Kong’s markets, which constitute China’s biggest offshore yuan hub, were closed Monday and will be closed Thursday for holiday.
The liquidity squeeze has been the worst since the end of last month, when the overnight borrowing rate for offshore yuan hit as high as 20% amid a heavy selloff in dim-sum bonds—yuan-denominated securities mainly traded in Hong Kong—since investors realized yuan assets are no longer a sure bet.
At that time, when investors cashed out of yuan bonds, they were given yuan. But banks in Hong Kong had most of their yuan locked up in clients’ time deposits, creating a liquidity mismatch for banks. Banks scrambled for short-term cash to meet their needs, driving up interest rates.
Rates fell shortly after as the city’s de facto central bank, the Hong Kong Monetary Authority, injected cash to soothe market liquidity.
In recent weeks, the PBOC was believed to have intervened in the offshore market by buying yuan through Chinese banks’ Hong Kong branches, in an effort to stabilize the currency, according to traders in the city.
“The [offshore yuan] wouldn’t have risen so much in last two weeks” without intervention, said Tommy Ong, Head of Wealth Management Solutions at DBS Group Holdings Ltd. in Hong Kong. “The market has been pretty bearish towards the currency given the slew of weak economic data.”
Last week, a preliminary measure of Chinese factory output in September hit its lowest point since the financial crisis, underscoring China’s vulnerability to global trade headwinds.
As a result, more banks, particularly Chinese ones, have been holding a large amount of yuan, leaving limited liquidity in the market.
The offshore yuan is 1.9% stronger than its value three weeks ago, after falling as much as 6% since the PBOC’s move to devalue the yuan and its pledge to insert more market influence to the currency regime on Aug 11.
The monetary authority’s chief executive, Norman Chan, said earlier this month that he wouldn’t comment on whether the PBOC had intervened in the offshore market. But even it did, he said the authority wouldn’t feel “awkward” as regulators world-wide have their own monetary policies to intervene in foreign-exchange markets.
The onshore currency is more stable as the PBOC has been intervening in its spot and derivatives markets to curb any selloff, according to The Wall Street Journal’s report.
Traders say banks in Hong Kong are hoarding cash ahead of China’s National Day holiday, which begins Thursday and lasts for seven days. Hong Kong markets will also be closed Thursday and trading activities here tend to be quiet during China’s holiday. That is another reason offshore yuan liquidity has ground tighter.
original source: http://www.wsj.com/articles/yuans-short-term-rates-spike-in-hong-kong-as-liquidity-dries-up-1443524864