China aims at speculators with offshore yuan rates of 94 percent

HONG KONG/LONDON (Reuters) - Implied overnight interest rates for China’s yuan hit a record high of 94 percent in Hong Kong on Tuesday, as suspected intervention from the Chinese central bank drained liquidity in the offshore market.

100 Yuan notes are seen in this illustration picture in Beijing November 5, 2013. REUTERS/Jason Lee/Files

In a volatile day’s trading, the last Reuters data for the market showed rates falling back to around 5 percent by 0900 GMT.

Dealers in London said that fall had been driven by some international players seeking to place yuan funds late, having missed out on the far higher rates quoted earlier in Hong Kong.

“It is very volatile. I would not rule out rates spiking again tomorrow,” said a dealer with one international bank in London. “It will take at least a few days for things to calm down, if they do.”

That followed an extraordinary 24 hours in Hong Kong money markets, which saw the return for depositing the yuan soar, first to around 40 percent on Monday, and then 94 percent on Tuesday - although some dealers said there had been trades between banks at even higher rates.

That increased the cost of funding for speculators wanting to sell forward contracts in the yuan as China battled to get the yuan’s offshore and onshore exchange rates under control.

Traders in Hong Kong said the People’s Bank of China had deliberately reined in supplies of its currency offshore to push up interest rates.

“There’s still a lot of swap squeezing going on. The funding for the swap positions is being squeezed by the central bank 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, speaking on condition of anonymity.

“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.”

Suspected interventions in the offshore yuan market briefly pushed the offshore spot rate to the same level as the onshore rate. The spread between the two rates had hit more than 1,600 pips last week.

Uptake of a 10 billion yuan ($1.5 billion) intra-day repurchase facility, rolled out by the Hong Kong Monetary Authority (HKMA) in 2014, rose on Monday, a spokeswoman for the city’s de-facto central bank said.

The HKMA, through the RMB liquidity facility and the Primary Liquidity Providers scheme, provides liquidity support to banks.

However, traders say the liquidity facility does not help much as the rates the HKMA charges for the funds are the same as market rates, which are very high.

The Hong Kong Treasury Markets Association fixed the offshore yuan overnight interbank offered rate (Hibor) at 66.8 percent on Tuesday. It was the highest level since the fixing was launched in June 2013.

Yuan accumulation in the offshore market lost momentum in 2015 after the currency’s largest yearly loss on record against the dollar and is still under heavy pressure as fresh weakness this year will reinforce investors’ aversion to the yuan.

Yuan deposits in Hong Kong stood at 864.2 billion yuan ($131.35 billion) in November, a bit higher than 854.3 billion yuan a month earlier but still hovering around two-year lows.

Additional reporting by Saikat Chatterjee in Hong Kong; Editing by Raissa Kasolowsky