World Economy

PBOC Buying Yuan Offshore to Support Currency

PBOC Buying Yuan Offshore to Support Currency
PBOC Buying Yuan Offshore to Support Currency

China’s offshore yuan was trading almost in line with its onshore counterpart on Tuesday, with the offshore yuan implied overnight deposit rate hitting a record high, indicating extremely tight liquidity outside the mainland.

China’s offshore yuan implied overnight deposit rate hit a record high of 94% in Hong Kong on Tuesday, with analysts saying the spike was caused by the Peoples’ Bank of China buying yuan offshore to support the currency which drained liquidity, Reuters reported.

Hong Kong Interbank Offered Rates for offshore yuan also hit record highs on Monday, as a combination of intervention by China’s central bank and arbitrage drained offshore yuan supply.

“The market suspects that the PBOC is possibly using major state banks to directly drain yuan liquidity in offshore markets,” said a dealer at a European bank in Shanghai. The dealer described the strength of the central bank’s actions as being of “nuclear-weapon” level strength. “Its actions are comparable to steps taken by other central banks when they previously fought against international speculators, such as George Soros,” he said.

Prior to market open, the PBOC set the midpoint rate at 6.56 per dollar, almost unchanged from the previous fix. The spot market opened at 6.58 per dollar and was changing hands at 6.57 at midday, only 0.03% weaker than the previous close. The offshore yuan was trading 68 pips, or 0.1% softer than the onshore spot at 6.58 per dollar.

   Opportunity to Arbitrage

The spread between onshore and offshore yuan hit its widest level in more than four years to more than 1,200 pips a week before, offering investors the opportunity to arbitrage the rate difference by paying off onshore debt with offshore yuan. The International Monetary Fund, which will include the yuan in its reserve currency basket, reportedly mentioned the wide spread between onshore and offshore yuan levels at the weekend and was said to have discussions with Chinese officials on the subject.

That has strengthened market expectation that the central bank will conduct more interventions. “There is still a lot of swaps squeezing going on. The funding for the swap positions is being squeezed by the central bank’s interventions via Chinese banks that used to be main liquidity providers of the offshore yuan,” said the head of FX trading at an Asian bank in Hong Kong. “It will last for a few days and perhaps we’ll see some relief later this week as a lot of short yuan positions will be forced to be squared within days.”

Still, some traders said that market’s expectation of yuan’s depreciation remained unchanged, given that the spread between forward rates in onshore and offshore market are still wide. The onshore one-year forwards contract was trading at 6.69, while the offshore one-year forwards contract was trading at a discount of 3.31% at 6.91.