PBOC’s ‘shock and awe’ won this round of the battle, but not the war with currency speculators
Offshore yuan interbank lending rate hits stratosphere in battle to punish speculators
Hong Kong has become ground zero for a battle between the People’s Bank of China and currency speculators, as the central bank employed a shock and awe tactic in defence of the currency by pushing the overnight funding rate to 200 per cent Tuesday afternoon.
Alleviating pressure on the offshore yuan is not without cost for the People’s Bank, however, as it may slow down progress for the internationalisation of the yuan.
The PBOC intervened in the offshore yuan market during the past two days by buying yuan which drove the yuan interbank market to a record high 200 per cent Tuesday, up from 25 per cent Monday and from Friday’s level of 4 per cent.
Pheona Tsang, head of fixed income of BEA Union Investment, said the PBOC intervention was reasonable after the offshore yuan dropped 1.75 per cent against the US dollar last week.
By Tuesday afternoon the yuan had recaptured all of its lost ground last week to trade at 6.5650 per US dollar in the afternoon.
“PBOC does not want the yuan to drop so rapidly so it has to intervene. This is in line with other central bank practises. The yuan has gone up so the PBOC intervention has been successful,” Tsang said.
