Caught On Tape: China's Currency Rigging

With the Yuan at its weakest against the Dollar since May 2008, it's becoming harder and harder (and more and more expensive) for China to hide/defend its devaluation strategy (CNH down over 13% since the 'one-off' Aug 2015 devaluation).


And in its latest effort to rig the currency's value, it currently costs more to borrow yuan overnight in Hong Kong than it does to borrow it for a year.

As The Wall Street Journal reports,

Here’s the latest sign that China’s attempt to internationalize its currency is flailing: During December, banks have had to pay around 6% on average to borrow yuan from each other overnight in Hong Kong, the biggest global market for yuan trading.


That is a prohibitively high cost for overnight funds—which typically form the base for short-term lending rates—and one that would send seizures through most normal markets. The equivalent cost to borrow U.S. dollars overnight is 0.437%.


But the market for Chinese yuan outside of China isn’t normal, as shown by these snapshots of how much it has cost at different times during the year to borrow yuan in Hong Kong, for terms from overnight to a year. Typically, it would cost less to borrow overnight and for shorter terms than it would for longer terms. 



At three times this year—in January, September and December—Chinese attempts to control the value or movement of its currency have sent the overnight yuan Hong Kong interbank offered rate, or Hibor, shooting up. That has rippled through other Hong Kong yuan-lending rates in weird ways, producing a motley assortment of yield curves.


On Thursday, overnight Hibor was fixed at 11.8%, up from 7.31% on Wednesday. It currently costs more to borrow yuan overnight in Hong Kong than it does to borrow it for a year—the sixth time that has happened in December.

"It’s not normal for this to be taking place,” said Mitul Kotecha, head of Asia foreign-exchange and rates strategy at Barclays in Singapore.

China has been trying to promote greater global use of the yuan, but this year, after sharp falls in the value of yuan prompted speculators to bet against it offshore, and Chinese to send increasing amounts of money overseas, officials have stepped in to control things.


Recently, China’s foreign-exchange regulator has instructed banks to limit how much money companies move out of the country, making it more difficult for big companies to send large amounts of yuan or dollars overseas. Traders say that has crimped the amount of yuan in Hong Kong, the main pool of the currency outside of mainland China, pushing up short-term rates. Borrowing costs have also ticked higher in anticipation of stricter capital controls.

Simply put, the rate spikes and contorted yield curves are symptoms of a dysfunctional, manipulated market.