Central bank tackles yuan slide with Hong Kong intervention
Nikkei Asian Review - Jan 12, 2016
HONG KONG -- China's central bank has doubled down on efforts to firm up the softening yuan, hatching a rare large-scale market intervention here to rein in speculation accelerating the slide.
The People's Bank of China apparently has been buying yuan for dollars on the Hong Kong market through state-owned banks since the end of last week. The yuan hit 6.58 to the dollar in offshore trading Tuesday -- 2.5% stronger than its weakest-ever level reached last Thursday, and in line with the onshore rate for the first time in around two months. The intervention is a clear sign that the central bank will not tolerate a major depreciation in the yuan, said Wang Tao, chief China economist at UBS.
Buying up the currency let the bank effectively create a yuan shortage in Hong Kong's short-term interbank market. Financial authorities here refrained from introducing substantial additional funds, causing the overnight Hong Kong Interbank Offered Rate for the yuan to leap from 13.4% to a record 66.8%. Letting short-term interest rates surge to that degree is seen as an attempt by regulators here and on the mainland to raise borrowing costs, thus limiting speculators' ability to make yuan sales.
Trading in the Shanghai-based onshore foreign exchange market is in principle restricted to the exchange of yuan for other currencies associated with transactions tied to real demand, including the import and export of goods. The yuan's value there may move only up to 2% above or below a reference rate set daily by the PBOC.
