Growing demand spurs borrowing costs of offshore yuan in Hong Kong
Borrowing costs of offshore yuan in Hong Kong surged to their highest levels in a year last week as banks became more reluctant to part with their money in the run-up to the end of the half-year and demand for funds increased with the opening up of more channels for onshore companies to tap the offshore yuan pool.
The overnight Hong Kong interbank offered rate for offshore yuan rose to the highest level since June last year to 4.589 per cent last Monday. The three-month rate hit 2.8985 per cent the following day, the highest since the middle of August.
“This is a liquidity management issue. As it is approaching the half-year end, [yuan] providers have become more conservative in lending … Many banks are due to publish half-year results. It is natural that every player wants to see a nicer ratio [on the balance sheet],” said Becky Liu, senior rates strategist of global research at Standard Chartered Bank.
The big players, such as the three note-printing banks, were liquidity providers while mainland banks and some foreign lenders that had a smaller offshore yuan balance sheet were net borrowers, Liu said.
Another reason for the pressure on rates is the increasing number of channels for onshore companies to borrow offshore, boosting the demand for offshore funds.
Last week, the People’s Bank of China said it would allow Singapore-based banks to lend yuan to the Suzhou Industrial Park in eastern China. The Singapore operations of Bank of China, Industrial and Commercial Bank of China and Standard Chartered have lent a combined 100 million yuan (HK$125.7 million) to firms based in the industrial township over the past week.
The country’s foreign exchange watchdog has also removed the quota limit for mainland firms to use their offshore units to borrow from offshore banks. Such offshore loans will only need to be reported to the authorities within 15 working days after execution rather than in advance.
“The BOC deals were small but the aggregate amount through cross-border remittance channels is sizeable,” Liu told the South China Morning Post. “We see the swap rates falling 20 to 30 basis points, but we do not see it falling back to the level we saw in February or March. In the second half, we are going to see the rising number of remittance channels of [the yuan] for onshore borrowers to continue to affect [offshore yuan] rates.”
The pace of growth in yuan deposits in Hong Kong has declined for four consecutive months this year. Official data showed such deposits in the city stood at 960 billion yuan at the end of April.