| HONG KONG
HONG KONG Jan 9 The Chinese yuan stabilized in
offshore markets on Monday and its borrowing costs retreated
from record highs, though investors anticipated Beijing would
take further steps to stop its currency from depreciating too
In recent weeks, Beijing has resorted to interventionist
tactics in both onshore and overseas currency markets by selling
dollars aggressively, and by strengthening measures to slow
capital outflows from China.
By afternoon trade, the offshore yuan (CNH) was
trading at 6.888 per dollar, slightly weaker than Friday's close
of 6.8490, in a sign that Beijing was letting market forces
dictate the direction of the yuan in Hong Kong so long as the
pace of depreciation remains within Beijing's comfort zone.
Some dealers still expected more sharp movements to come.
"Despite some semblance of order emerging, we should expect
volatility to remain high," warned Stephen Innes, senior trader
at FX broker OANDA in Singapore, in a note.
"Underlying yuan depreciation pressures should return as
fundamental reasons that are driving depreciation, such as
capital outflows and concerns on Trump's China policies, haven't
U.S. President-elect Donald Trump's protectionist policies
especially with relation to global trade and his tough stance on
Chinese companies doing business in the United States have
raised concerns among global investors that Beijing may pursue
retaliatory policies. China had been the biggest buyer of U.S.
debt until October, when it was overtaken by Japan.
On Monday morning, overnight yuan deposit rates
fell to around 10 percent from Friday's high of 87 percent.
Chinese monetary authorities had induced a spike in interbank
rates for the offshore yuan last week that made it
prohibitively expensive to short the Chinese currency.
As the short-sellers rushed to cover, the offshore yuan
jumped 1.8 percent last week, its biggest weekly rise
on record, according to Thomson Reuters data.
But broader concerns have not gone away. Data released on
Saturday showed China's foreign exchange reserves fell for a
sixth consecutive month, hitting near six-year lows of $3.011
trillion by the end of December.
"If intervention does not appear sustainable, a currency
crisis will erupt well before reserves are exhausted," Mark
Williams, chief China economist at Capital Economics in London,
said in a note.
On Monday, some of those funding pressures showed signs of
easing with the CNH Hong Kong Interbank Offered Rate benchmark
(CNH HIBOR), down to 14.05 percent compared to 61.33 percent on
Last week's jump in overnight rates was caused by a sudden
withdrawal of Chinese banks - traditionally the biggest lenders
of overnight money - from the offshore yuan money markets.
Speculators, who borrowed funds in these markets to bet against
the yuan, had to scramble to cover their positions.
The People's Bank of China (PBOC) had created a CNH shortage
in the offshore market, the head of local FX trading at a
European bank in Singapore which trades with Chinese state
He said investors had mostly been long the U.S. dollar
versus the yuan and other currencies at the end of last year.
"Given the year end dynamics, the PBOC used the opportunity
and created a big CNH shortage by asking Chinese banks to start
offering term CNH liquidity at higher rates.
"Spot CNH liquidity is anyway tight due to a falling deposit
base. That has created a massive shortage and CNH is likely to
be supported unless the situation normalizes," he said.
Despite the sharp drop in HIBOR rates, market watchers
believe the funding costs are likely to stay elevated ahead of
the Chinese New Year break at the end of the month.
(Additional reporting by Michelle Chen and Winni Zhou in
SHANGHAI; Editing by Simon Cameron-Moore)