The renminbi in Hong Kong is poised for a record run of trading at a stronger level against the dollar than its mainland cousin — a key development that could aid Beijing’s efforts to slow capital outflows from the mainland.
A weaker rate for the Chinese currency in markets outside the mainland has been the norm since Beijing’s unexpected devaluation of the renminbi in August 2015. Such weakness has also been a strong driver of capital outflows from China since it signals that international investors expect the currency to weaken further, encouraging Chinese citizens to move funds out of the country.
But Thursday marked the eighth day that the offshore renminbi traded at stronger levels than in onshore market; a ninth day on Friday would mark the longest winning 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 that market began 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 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 London morning trade on Thursday, the offshore renminbi gained from the dollar’s weakness, reaching Rmb6.8634, while the onshore rate lagged behind at Rmb6.8965.
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 between 1 and 2 per cent.
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