Analysis | Surging yuan borrowing costs in Hong Kong: What you need to know

Hong Kong Interbank Offered Rates for yuan loans jumped by records to all-time highs across all tenors yesterday as intervention by China to support its exchange rate tightened the currency’s supply in the offshore market.
Here’s what you need to know about the surge:

What is Hibor?
Yuan Hibor is the benchmark used to price loans in the currency outside of China and was introduced by Hong Kong’s Treasury Markets Association in June 2013 amid rising demand for such credit. Fixings for tenors ranging from overnight to one year are released daily at 11:15 a.m. local time and based upon contributions submitted by 15-18 qualifying banks.

Why is it rising?
The People’s Bank of China has been buying yuan in Hong Kong since the offshore exchange rate sank last week to a record 2.9 percent discount to the onshore level, a gap that raises questions about the yuan’s value before it joins the International Monetary Fund’s reserve-currency basket this year. The PBOC’s purchases drain funds from the banking system, tightening the supply of the currency and so making it more expensive to borrow.
Is it only Hong Kong that’s affected?
No, Hong Kong is the biggest centre for offshore yuan financing but comparable rates for loans in the currency spiked in other markets. Taiwan’s all jumped by record amounts to all-time high, with the overnight rate rising 47.6 percentage points to 59.72 percent, according to Taipei Forex Inc. prices.
Who gets hurt by the rate increases?
The biggest losers will be those who sold short the yuan in the offshore market, said Sue Trinh, head of Asia foreign-
exchange strategy at Royal Bank of Canada in Hong Kong. Higher interest rates make it costlier to execute the trade, which entails borrowing the currency.
Global investors that hold yuan-denominated debt in the offshore market may also be hit, according to James Yip, a fund manager at Shenwan Hongyuan Asset Management (Asia) Ltd. in Hong Kong. “If you invest in Dim Sum bonds, a lot of the time your funding cost will be offshore yuan, so it’ll very hard to keep the position.”
Longer-term, elevated Hibor rates would hamper China’s push for the currency to take on a greater role in global trade and finance. That would be bad news for Hong Kong, the leading centre for offshore yuan financing. Global companies requiring yuan to finance trade and investments in China wouldn’t be too impacted as they can already obtain relatively cheap funding in Shanghai, where interbank rates with tenors of up to a month remain below 3 percent.
Why doesn’t the HKMA do something about it?
Hong Kong Monetary Authority said on Monday that it had provided yuan liquidity to banks and that the interbank market for yuan loans was operating in an “orderly manner.” It didn’t respond to questions about whether it added funds again yesterday.
“The HKMA is notably absent from the market,” said Andy Ji, a Singapore-based foreign-
exchange strategist at Commonwealth Bank of Australia. “They’re trying to help the PBOC achieve their objective to converge the renminbi spot rates,” he said, using an alternative name for the yuan.

When will rates return to more normal levels?
The surge in Hong Kong borrowing costs will probably be temporary because the PBOC seems to have succeeded in efforts to narrow the gap between onshore and offshore exchange rates, said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd.
“Given that the Chinese have achieved their target of narrowing the convergence between offshore and onshore, we could see the end” of the surge in rates, Lam said. “I don’t see this as a start of a crisis, at least for now.”
The yuan was 0.15 percent weaker in Hong Kong than Shanghai as of 5:44 p.m. and earlier the rates converged for the first time since October. The gap averaged 1.7 percent last week. Saijel Kishan & Justina Lee, Bloomberg