Currency traders trying to bet against the yuan are facing growing headwinds from China’s efforts to ramp up the expense of doing so in Hong Kong.
(Bloomberg) — Currency traders trying to bet against the yuan are facing growing headwinds from China’s efforts to ramp up the expense of doing so in Hong Kong.
The costs for banks to borrow the yuan from each other in Hong Kong surged across maturities this week, with the rate on three-month contracts extending a five-year high on Wednesday. That means it’s getting more expensive for traders to borrow the Chinese currency in the overseas market and sell it against the dollar.
Beijing has ramped up its fight against yuan bears after its slump toward a record low offshore, with the People’s Bank of China delivering a strong verbal warning against speculation on Monday amid several other measures. Policymakers for years have been highly vigilant of any rapid yuan declines, as such moves can trigger a vicious cycle of capital outflows and even sharper depreciation.
China’s currency has been weighed by concern about sluggish growth and the country’s widening monetary policy divergence with the US that reduces the yuan’s appeal versus the higher-yielding dollar.
Since mid-August, the PBOC has been supporting the yuan versus China’s trading partner exchange rates with its daily reference levels for the managed currency, according to calculations by Bloomberg. And on Wednesday, the central bank said it plans to issue more yuan-denominated bills than are maturing in Hong Kong next week, a strong signal that will also pressure borrowing costs with liquidity already tight in the run up to quarter-end.
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“We see the authorities as ramping up efforts to curb yuan’s depreciation and liquidity in the offshore market is being tightened as a part of the toolkit to rein in yuan weakness,” said Eddie Cheung, a senior emerging markets strategist at Credit Agricole CIB in Hong Kong. “We don’t think markets are too keen to test the authorities here.”
The yuan’s three-month interbank rate in Hong Kong, known as Hibor, rose to 4.23% on Wednesday, while the one-month tenor climbed to 4.79%. The overnight rate rose beyond 5% for the first time since April 2022, moving toward the comparable borrowing costs for the US dollar.
Liquidity Crunch
While engineering a liquidity crunch overseas is an effective tool to squeeze yuan bears, it’s not a preferred one due to the high reputational cost it carries and was last used during the US-China trade war in 2018. Such a measure can dent the offshore yuan’s image as a more liberalized version of its onshore counterpart and also hurt Hong Kong’s role as an Asia financial center free of China’s control.
Its return underscores the central bank’s decisive stance of defending the currency under the leadership of a new governor this year.
Still, China’s most drastic method — direct central bank intervention using the massive official FX reserves — has been kept on hold and few analysts expect such a move. That was last used after the yuan’s shock devaluation in 2015.
The offshore yuan gained 0.2% to just under the 7.29 per dollar level Wednesday, narrowing its gap with the onshore unit which traded at just over 7.28 per dollar. A gauge of whether its profitable or not to short the yuan via the forward market moved to signal the latter.
Market Skepticism
While Beijing’s defense measures have helped stabilize the yuan somewhat, skepticism remains whether such tools are game changers in the absence of a less hawkish Federal Reserve or a pickup in the world’s second-largest economy.
“Whether the dollar-yuan pair’s bearish reversal can pan out requires evidence of sustained economic recovery and that is unlikely in the near-term,” Maybank strategists led by Saktiandi Supaat wrote in a note. “The economic resilience of the US could keep Treasury yields and the dollar supported on dips.”
–With assistance from Ran Li.
(Updates throughout)
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