China raises offshore yuan reserve requirements, yuan strengthens

Chinese authorities moved to tighten liquidity in the offshore yuan market on Monday, in what observers said amounted to a short-term move towards increased capital controls to deter speculation against its currency.

The People’s Bank of China said it would normalise its reserve requirements for offshore financial institutions’ onshore deposits as of 25 January.

Reacting to the decision, the so-called offshore yuan appreciated by 0.46% versus the US dollar in Hong Kong trading to reach 6.5833, following a rise of 1.05% in the week before.

Reserve requirements for offshore lenders would be the same as the 17.5% applied to onshore banks, Bloomberg reported citing people familiar with the matter.

“This is another tool to manage liquidity in the offshore market and aims at draining liquidity currently to increase the cost of selling the CNH forward,” analysts at Danske Bank explained in a research note sent to clients.

“China wants to signal very clearly that it is not aiming for a devaluation of its currency. We thus expect that the PBoC will try to keep the CNY stable in the short term using the above-mentioned weapons."

That saw the one-month Hong Kong interbank offered rate or HIBOR jump 251 basis points to 11.84%. On 12 January it reached an all-time high of 15.74%.

In parallel, on Monday the PBoC set the daily reference rate or ‘fixing’ for the yuan 0.07% higher.

The onshore yuan strengthened by 0.09% from its close on Friday to 6.5780.

Analysts said the move by the central bank could tie-up 220bn-280bn yuan in funds.

One week HIBOR gained 370 basis points to 11.9% on Monday, with some analysts citing further intervention from Chinese authorities in the offshore market.

“One reason the PBOC is rushing towards convertibility, despite the risks, is that it feels that it must seize the chance while it has Mr Xi’s blessing. But better to retreat temporarily on one front (in reference to the country's capital controls) than to trigger a global panic,” The Economist said in its latest weekly edition.