Hong Kong
Betting against the yuan just got a whole lot more expensive.
The cost of bearish wagers on the Chinese currency, as reflected in the offshore yuan’s 12-month forward points, soared the most since January 2016 on Thursday, according to data compiled by Bloomberg. The move came amid speculation that China was restricting banks’ ability to lend yuan offshore.
The yuan jumped 0.7 per cent to 6.9015 a dollar in offshore trading at 5:55pm in Hong Kong, adding to earlier gains that were fuelled by a stronger-than-expected daily fixing from the central bank and news that Chinese and US officials will engage in low-level trade talks later this month.
“Many offshore investors unwound their short yuan positions today,” said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore.
Chinese authorities have been trying to limit bets against the yuan after the currency depreciated more than 9 per cent since March, approaching the closely watched level of 7 per dollar. While a weaker exchange rate has helped Chinese exporters weather the impact of US President Donald Trump’s tariffs, policymakers worry that a disorderly drop could trigger capital outflows and threaten China’s financial stability.
As the yuan’s slump has accelerated in recent weeks, the People’s Bank of China has taken several steps to slow its drop. Two weeks ago, the central bank made it costlier to place short bets against the currency with forwards. And last week, the monetary authority urged big banks to avoid bearish momentum trades.
On Thursday, Reuters reported that the PBOC banned commercial banks from using interbank accounts to deposit or lend yuan offshore through the nation’s free-trade zone channels. The PBOC didn’t immediately respond to a faxed request for comment.
Downward pressure on the yuan has been growing on multiple fronts. Not only has the US trade war hurt market sentiment, but weaker-than-estimated figures on Chinese fixed-asset investment and credit creation this week have fuelled concern that the $12 trillion economy is already slowing. The PBOC has kept borrowing costs low even as the Federal Reserve tightens, raising the spectre of capital outflows as the yield advantage for Chinese fixed-income securities shrinks.
When similar pressures were building in 2015 and 2016, Chinese authorities squeezed yuan bears by lifting offshore funding costs dramatically. They also spent billions in foreign-exchange reserves to buy the currency and clamped down on capital outflows.
While the government’s response this time around has been much less extreme, policymakers have sent a clear message that they want to avoid disorderly swings in the exchange rate, according to Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong.
“PBOC’s bottom line is to prevent one-way yuan depreciation,” Li said. “Investors probably have unwound short-yuan positions amid fear of further intervention.”
