(Bloomberg) — Yuan funding costs in Hong Kong surged to levels unseen in years, signaling concern that Beijing’s efforts to stabilize the currency may lead to tighter liquidity in the offshore market.
Most Read from Bloomberg
The offshore yuan’s overnight interbank interest rate in Hong Kong rose to 8.1% on Tuesday, the highest since June 2021. The 1-month rate also climbed to highest since April. Tighter cash conditions make it more expensive for traders to short the currency, effectively damping bearish bets.
“The People’s Bank of China may keep the overnight Hibor at over 4% for a longer time,” said Zhaopeng Xing, a strategist at Australia & New Zealand Banking Group. The central bank may want to prevent the yuan’s slide toward 7.40 per dollar in the near term, he said.
The PBOC has been using its daily reference rate, which limits moves in the onshore yuan to 2% on either side, to stem currency losses. However, expectations are growing that it will enlist other tools to manage the currency in the face of tariff threats from the US and a flailing economy.
In a clear sign of official concerns, the central bank vowed in a readout of its latest quarterly monetary policy meeting to crack down on behavior that disrupts the market and prevent the building of one-sided bets as well as any overshoot in the exchange rate. The rhetoric shows strong resolution to stabilize the yuan, a PBOC-backed newspaper said in a commentary Monday.
Local media outlet Yicai reported on Monday that the PBOC was planning to increase bill auctions in Hong Kong, a move that’s expected to mop up excess liquidity. It has in the past engineered a liquidity squeeze in Hong Kong to stabilize the yuan.
Offshore yuan liquidity has been tightening in the swap market, especially in the overnight tenor since last week, due to heavy borrowing demand from banks including state-owned ones, according to traders. Reduced offshore yuan liquidity provision from state banks and a report of additional bill issuance this month have worsened the demand-supply gap, said the traders who asked not to be named.
Dollar-offshore yuan’s one-month forward points touched the highest since August 2023 this week in another sign of tighter liquidity.
“With the gap between yuan fixing and spot wide, other tools such as offshore liquidity is likely to be deployed,” said Frances Cheung, strategist at Oversea-Chinese Banking Corp. The PBOC may need to issue a materially higher amount of bills if it aims to push up offshore yuan rates as deposits offshore exceed 1 trillion yuan ($136.5 billion), she said.