Offshore Yuan Shows Depreciation Stress as Fed Rate Hike Looms

(Bloomberg) -- The offshore yuan outpaced declines in the Shanghai rate this week, adding to signs of renewed stress on the Chinese currency as investors brace for higher borrowing costs in the U.S.

The exchange rate in Hong Kong’s overseas market has fallen 0.8 percent this week, the most since mid-November, while the onshore rate is down 0.15 percent. The moves come before an expected Federal Reserve interest-rate increase next week, which would boost the dollar and lower money flows to emerging markets.

The yuan’s accelerated declines -- it is Asia’s worst performer this week after Japan’s yen -- follows data showing China’s foreign-exchange reserves shrank to the smallest in more than five years amid speculation policy makers defended the currency. Authorities have rushed to ease the pressure by taking steps to restrict money from leaving the country. Another risk is a renewal of Chinese citizens’ annual currency conversion quotas next month, which may spur a rush to the dollar.

“The offshore yuan is being moved by external markets, in line with other emerging-market currencies, to reflect the outlook amid an almost certain Fed interest-rate hike,” said Banny Lam, head of research at CEB International Investment Ltd. in Hong Kong. “The onshore yuan is finding some support on speculation authorities will tighten their grip on capital outflows. There have been a lot of reports about how the government is stepping up scrutiny of outbound capital flows, and this will probably continue.”

The offshore yuan was down 0.2 percent for the day at 6.9240 a dollar as of 4:30 p.m. in Hong Kong, while the exchange rate in Shanghai fell 0.26 percent, the most since Nov. 23. The People’s Bank of China earlier weakened the currency’s daily fixing, which restrains onshore spot price moves to 2 percent on either side, by the most since late October.

In the bond market, Chinese government notes headed for a second weekly decline, with the 10-year yield rising six basis points to 3.11 percent. The three-month Shanghai Interbank Offered Rate rose for the ninth week in a row, the longest run of increases since February 2014.

The PBOC drained a net 535 billion yuan ($77.5 billion) from the financial system this week, data compiled by Bloomberg show. That’s the biggest withdrawal since July and is in line with policy makers’ efforts to reduce excessive leverage.

“The PBOC is maintaining its tightening bias, pushing forward deleverage efforts amid mounting pressure on the yuan,” said Xu Chenxi, an analyst at Nanhua Futures Co. in Hangzhou, Zhejiang province. “It will continue to lock in short-term funds but at the same time ensure long-term cash supply can meet market demand, though at higher costs. We don’t expect a repeat of the 2013 cash crunch when financial institutions simply couldn’t find money. ”

For other China news this week:

• PBOC Tightens Screws on Leverage as Money Rates Reach New Highs

• China Banks Lure Dollar Sellers With Discounts as Yuan Drops

• China’s Outflow Curbs Disruptive for Business, EuroCham Says

• Yuan Pessimists Proliferating in China as Quota Reboot Looms

• China’s Foreign Reserves Drop Most in 10 Months as Yuan Slumps

To contact Bloomberg News staff for this story: Robin Ganguly in Hong Kong at rganguly1@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly

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