This issuance is anticipated to be the largest since the central bank began conducting regular bill auctions in Hong Kong in 2018, as reported by Bloomberg data.
The recent decline of the yuan, driven by a sluggish Chinese economy and the possibility of increased US tariffs, has led traders to question the PBOC's resolve in defending the currency. Nevertheless, the central bank has consistently demonstrated its commitment to stability by supporting the yuan through its daily fixings and vowing to prevent significant fluctuations in exchange rates.
“We cannot rule out policymakers deploying even higher funding squeeze in the short term,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. “At this point, the combination of fixing pattern and offshore funding squeeze are intended to guide for a stable yuan.”
The recent issuance of additional bills in Hong Kong is a strategy that the People's Bank of China (PBOC) has employed several times in the past, with the most recent instance occurring in 2023. This move to provide a wider array of yuan-denominated assets in the city aligns with Beijing's long-term goal of promoting the currency on a global scale.
Concerns regarding tighter liquidity led to a spike in the borrowing costs for the yuan in Hong Kong, reaching levels not seen in years earlier this week, although they have since moderated. The overnight Hong Kong Interbank Offered Rate (Hibor) for the offshore yuan decreased after peaking at 8.1% on Tuesday, marking the highest rate since June 2021.
This marks the first occasion in months that the PBOC has issued offshore bills without set maturities, indicating a clear intention to counteract any potential depreciation of the yuan in the near future, according to Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong. She noted that the liquidity conditions for the offshore yuan are likely to remain tight for an extended period following Donald Trump's inauguration and possibly until early February after the Lunar New Year.
Historically, the PBOC has relied on its daily reference rate to bolster the yuan, especially as the dollar surged in the wake of Trump's election victory. On Thursday, the central bank set the fixing rate, which restricts the currency's fluctuations by 2% in onshore trading, at a significantly stronger level than anticipated.
This approach stems from Beijing's concerns that chaotic capital outflows could lead to a panic sell-off of yuan-denominated assets, jeopardizing an already sluggish economic recovery. Analysts continue to predict a weakening of the currency this year, influenced by factors such as a significant interest rate gap compared to the US.
Nevertheless, the PBOC's focus on maintaining yuan stability comes with risks, as it may lead to trading disruptions or reduced liquidity as the currency approaches its designated limits. On Wednesday, the yuan weakened, trading near the threshold that the policy aims to avoid.
“The mopping up of liquidity is likely to keep offshore yuan funding relatively tight in the near-term,” said Wee Khoon Chong, senior APAC market strategist at BNY. However, “elevated dollar and the on-going tariff uncertainties is likely to exert downside pressure on the yuan in the near-term.”
The offshore Chinese yuan strengthened 0.1% to 7.3486 per US dollar on Thursday, subsequent to the central bank's announcement of bill sales. The onshore market exhibited relative stability, with the currency trading at 7.3315, near the lower bound of its trading range, established at 7.3323 by the day's fixing.
Bloomberg data from January 9th reveals that the central bank holds 140 billion yuan in previously issued offshore yuan bills maturing later this year. The settlement date for bills scheduled for issuance next week is January 17th.