Yuan erases losses in Hong Kong on suspected China banking Intervention

The yuan rebounded from early losses in Hong Kong’s offshore market, spurring speculation Chinese policymakers are propping up the currency after its discount to the onshore spot rate doubled.

The yuan was trading 0.13 percent stronger at US$6.5227 as of 11:45am in Hong Kong, after sliding as much as 0.19 percent, data compiled by Bloomberg showed. It erased the drop within 15 minutes of reaching the day’s low. In Shanghai’s onshore market, the yuan fell for a ninth day, the longest run of losses since at least 2007 and was 0.07 percent weaker at US$6.4655.

A major Chinese bank placed a “sizeable bid” for yuan at around US$6.53, triggering the rebound in the offshore rate, Shanghai Commercial Bank Ltd Hong Kong-based head of research Ryan Lam said.

“Trading will be thinner around Christmas, which means the People’s Bank of China (PBOC) can achieve its goal even with small-scale interventions,” he said.

China’s efforts to prop up the currency appeared to have been scaled back since the start of this month, after it won reserve status at the IMF and this spurred bets on further depreciation.

The nation’s foreign-exchange reserves tumbled by more than US$200 billion over the last four months as the PBOC bought yuan to stabilize the exchange rate following a surprise devaluation in August.

The gap between the yuan’s rates at home and overseas exceeded US$0.08 — 800 so-called pips — prior to yesterday’s suspected intervention.

The rebound in Hong Kong closed the gap to about 570 pips and Lam said he expects policymakers to ensure the spread does not exceed 1,000 pips. The difference has averaged about 680 pips this month, compared with 300 last month.

Twelve-month non-deliverable forwards for the yuan traded at a 4.9 percent discount to the onshore spot rate on Friday last week, the largest gap in more than three months. An Aug. 24 spread of 5 percent was the largest since late 2008, at the height of the global financial crisis.

“The bearish sentiment in the yuan spot and forwards market is near extreme levels, reflecting market herd behavior,” ABN Amro Bank NV Singapore-based strategist Roy Teo wrote in a note on Tuesday.

“We expect the central bank to punish speculators betting that the depreciation of the yuan is a one-sided bet. We suspect that the PBOC has resumed its intervention activities to defend weakness in the offshore yuan, resulting in offshore yields spiking higher,” Teo wrote.

The PBOC cut the yuan’s reference rate for the eighth day in a row to the weakest level since July 2011. This followed the PBOC’s move on Friday to play down the currency’s recent losses by saying its performance should not be measured against the US dollar alone. The onshore spot rate can only trade as much a 2 percent on either side of the daily fixing.

Financial institutions, including the PBOC, sold 221 billion yuan (US$34 billion) of foreign exchange last month, a sign of capital outflows, data showed on Tuesday. To help stem the exodus of funds China has introduced measures including a halt to offshore bank borrowing from the mainland through bond repurchases and a suspension of new applications under the Renminbi Qualified Domestic Institutional Investor program, which allows yuan from the mainland to be used to buy offshore securities denominated in the Chinese currency.

The initiatives helped push Hong Kong’s interbank offered rate for the yuan to the highest since September this month.

Emerging-market currencies, including the yuan, are facing increased depreciation pressure as the US Federal Reserve prepares to raise interest rates for the first time since 2006.

There is a 76 percent chance the US central bank could tighten policy at its meeting today, futures contracts show.

A rebound in the offshore yuan accompanied by a spike in funding costs might be a “Christmas surprise” as US dollar gains slow after the US Federal Reserve meets this week, Morgan Stanley strategists led by Kewei Yang wrote in a note on Tuesday.