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Hibor jumps in Hong Kong as China makes it more expensive to bet against the yuan

The key measure of borrowing costs in the world’s leading offshore market for the yuan soared to an eight-month high this week, in a sign that China’s central bank is draining offshore liquidity to make it more costly for traders to bet against the Chinese currency.

The overnight Hong Kong Interbank Offered Rate, or Hibor, jumped 15.7 percentage points in its second-biggest gain on record to 23.68 per cent on Monday, before dropping to 12.13 per cent yesterday.

The move by the People’s Bank of China underscores the Chinese government’s resolve to ensure the yuan maintains its stability against major currencies heading into its inclusion on October 1 as the fifth currency within the International Monetary Fund’s basket of Special Drawing Rights (SDR).

The move is also to ensure that this week’s New York visit by Chinese Premier Li Keqiang won’t be encumbered by the spectre of a gyrating currency.

Li told US President Barack Obama on Tuesday that there’s no reason for the yuan to continue to depreciate, reiterating the Chinese government’s commitment to keep the yuan stable before it becomes an SDR currency. China’s government considers the SDR inclusion as a major vindication of its economic policies and a milestone in the internationalisation of the yuan.

For the purpose of a stable transition into the SDR basket, the central bank needs to narrow the spread of offshore and onshore rates to keep the currency’s value stable.

The central bank needs to drain up liquidity to stem the risks of deprecation from passing through to the onshore market.

In January, the Chinese central bank intervened in the currency markets to counter devaluation pressures, driving up the overnight Hibor rate to a record 66.81 per cent.

“Offshore yuan market is getting marginalised as Beijing is making foreign investors easier to transact in the onshore market since this year,” said Li Wei, an economist with the Commonwealth Bank of Australia. “It is not within PBOC’s consideration whether to support or hit the offshore market. Its intervention is a short-term economic policy to ensure a stable yuan.”

The Chinese central bank’s defence of the yuan comes as traders await the Bank of Japan’s announcement on Wednesday on whether to further loosen monetary policy.

The US Federal Reserve is also scheduled to meet this week, and the minutes of its meeting will offer clues on when US interest rates will rise.

Yuan deposits in Hong Kong shrank nearly by a third to less than 667.1 billion yuan at the end of July, from the peak of 1 trillion yuan in December, according to the Hong Kong Monetary Authority.

Beijing is tweaking the way on how to promote the yuan’s internationalisation, said Xie Yaxuan, chief economist at China Merchants Securities and a former official at the State Administration of Foreign Exchange.

“The central government may regard the opening of the onshore market, especially the interbank bond market, as the best path for the yuan’s global push, rather than boosting offshore yuan markets,” he said.

Nominally, the Chinese central bank has removed the ceiling of deposit rates and the floor of the lending rates, and it tolerates a bigger gyration in the yuan’s exchange rate.