China has opened a new front in its war to curb currency depreciation by buying up renminbi offshore, foiling the burgeoning carry trade and driving the cost of borrowing to a record high.Overnight Lending Rates
The elevated overnight CNH Hong Kong Interbank Offer Rate (Hibor) shows how volatility in China’s currency. It is also a potent sign of the lengths to which China's central bank is prepared to go to support the value of offshore renminbi, known as CNH.
The overnight CNH Hibor, a daily benchmark for offshore renminbi interbank lending, hit a record-high 13.4 per cent on Monday, up from 4 per cent on Friday and the highest level since the benchmark was launched in 2013. The one-week rate surged from 7.1 per cent to 11.2 per cent.
The People’s Bank of China, acting through state-owned banks in Hong Kong, is buying up renminbi to curb CNH weakness and narrow the gap between CNH and onshore renminbi, known as CNY, analysts say.
“It looks like PBoC wants to maintain a high cost of shorting CNH,” said Zhou Hao, Asia economist at Commerzbank in Singapore.
“On the other hand, it also shows that positioning is quite crowded — everyone borrows CNH to short — which means that a short covering could be very wild if it takes place.”
- HIBOR is the overnight lending rate between banks for loans denominated in yuan.
- LIBOR is the rate for dollars.
- EURIBOR is the rate for euros.
Short Covering Spike
For now, China got the reaction it wanted. But it's meaningless. Such efforts always fail.
Driving out shorts does not change fundamentals. China found that out with ill-advised attempts to shore up its stock markets.
Apparently it needs a lesson in regards to currency prop jobs.
The difference between the onshore and offshore yuan is a symptom of capital flight, not a symptom of speculation. All China did was create a pent-up demand to sell yuan.
The fact remains China has a Boatload of Insolvable Problems caused by conflicting goals between growth and rebalancing.
Draining liquidity to drive out shorts cannot solve any problems. It's a war China will lose.
Mike "Mish" Shedlock