The offshore renminbi is poised for a record run of trading at a stronger level against the US dollar than its onshore cousin, in a key development that could aid Beijing’s efforts to slow outflows from the mainland.
A weaker offshore rate has been the norm since China’s unexpected devaluation of its currency in August 2015. It has also been a strong driver of mainland outflows since it signals that international investors expect the currency to weaken further, encouraging Chinese citizens to move funds offshore.
But Thursday is the eighth day that the offshore renminbi has traded at stronger levels than in the onshore market; a ninth day on Friday would mark the longest run since the 2015 devaluation.
In December, China tightened controls on capital outflows in an effort to slow the depreciation of its currency. Large transactions will be more closely scrutinised, while extra paperwork was added to the process for individuals to use their $50,000 per year limit for foreign exchange.
Last week the offshore renminbi recorded its biggest two-day gain against the dollar since the offshore market was introduced in 2010, surpassing the onshore level in the process. The move confounded expectations that the Chinese currency would continue its weakening trend of last year, when the offshore rate lost 5.8 per cent and the onshore declined by 6.5 per cent.
Traders and analysts have speculated the early-year drama has been spurred by intervention in the foreign exchange market — something the People’s Bank of China never confirms or denies — and that any action was designed to engineer the stronger offshore rate.
“That’s what China has done much better this year — manage the offshore rate,” said the regional head of currency trading at one bank. “Big renminbi developments never happen because of offshore speculators; it’s all about people onshore having confidence in the signals they see in the offshore market.”
In early afternoon trading on Thursday, the offshore renminbi traded at Rmb6.8915 against the dollar, while the onshore rate stood at Rmb6.9095.
The onshore market is technically far more tightly controlled, with the Chinese currency permitted to trade 2 per cent either side of a midpoint against the dollar fixed daily by Beijing. But the amount of renminbi held offshore has fallen by more than a fifth in the past year, making it in theory far easier for an intervention-minded central bank to control its currency’s direction.
Last week the offshore cost of borrowing renminbi overnight in Hong Kong spiked to near-record levels at 61.33 per cent, making it painfully expensive for anyone betting on a weakening renminbi to borrow the currency to sell short. That rate was the second highest, just shy of the record 66.8 per cent hit in January 2016 when the PBoC was believed to be intervening to stem a sharp drop in the renminbi that threatened to destabilise world markets.
On Thursday, the Hong Kong interbank offered rate (Hibor) for overnight lending in renminbi, had dropped to 2.68 per cent, close to its usual range of 1 and 2 per cent.
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