China sells 10 billion yuan of bills in Hong Kong to protect currency ahead of National Day

(SCMP) – China’s central bank made its latest move to shore up the yuan exchange rate in Hong Kong on Thursday, which in turn projected a vote of confidence in the embattled city as an international financial hub.

The decision by the People’s Bank of China’s (PBOC) to auction 10 billion yuan (US$1.4 billion) of six-month bills was an attempt to stabilise the yuan ahead of the National Day holiday on October 1 – which will celebrate the 70th anniversary of the founding of the People’s Republic, according to Zhou Hao, a senior economist at Commerzbank in Singapore. It also came ahead of important trade talks with the United States also due to take place next month.

Thursday’s sale came a day after China’s Ministry of Finance reopened a 4.5 billion yuan (US$631 million) sovereign bond issuance in Hong Kong, which is the main offshore trading centre for the yuan, with bank deposits totalling 616 billion yuan (US$86 billion) at the end of July.

The PBOC’s decision to issue the bills to drain yuan funds from the Hong Kong banking system was an apparent sign of its primary motivation to prevent a further depreciation of the currency, analysts said, as having less liquidity in the market will push up borrowing costs and make it more expensive for speculators to bet on a weakening yuan.

Both sales in Hong Kong drew decent interest because of expectations that China will keep a relatively loose bias in its monetary policy easing stance given the sluggish growth of its economy.

“The auction was well received, reflecting decent demand for yuan-denominated paper offshore given expectations that China will keep its interest rates anchored,” said Frances Cheung, Westpac Banking’s Asia head of macro strategy.

The PBOC six-month bills were issued at a rate of 2.89 per cent, slightly higher than the 2.82 per cent rate on six-month bills sold in June, and similar to the 2.90 per cent rate on three-month bills last month.

Thursday’s auction was 3.6 times oversubscribed, compared with 2.6 times in August when 20 billion yuan (US$2.8 billion) in three-month bills and 10 billion yuan in one-year bills were auctioned. Demand came from commercial banks, mutual funds, foreign central banks and international financial organisations.

On Tuesday, PBOC governor Yi Gang said there was no need for China to follow a number of global central banks in recent weeks by enacting major interest rate cuts. Nevertheless, many analysts expect at least two more cuts this year in banks’ reserve requirement ratios as well as in its new benchmark lending rate, the one-year loan prime rate, in the rest of the year.

The PBOC has already issued 130 billion yuan (US$18.2 billion) of central bank bills with time frames of three months, six months and one year through six issuances since it reached an agreement with the Hong Kong Monetary Authority a year ago. Thursday’s sale was also the third since anti-government protests that started in June aroused concerns over the city’s economic future and its status as a magnet for international capital.

It said in previous statements that the sales will enrich the market for yuan-denominated products, improve the yuan offshore bond yield curve and facilitate the use of the Chinese currency.

China’s efforts to promote the yuan as a global currency have made only marginal progress in recent years. According to the Bank for International Settlements, the yuan was the eighth most-traded currency in the foreign exchange market, with a daily average turnover of US$284 billion, and a share of all currency trades of 4.3 per cent. The world’s dominant currency, the US dollar, has a turnover of US$5.82 trillion and accounts for 88 per cent all currency trades.

This week’s sale is just one of the measures used by Beijing to control speculators and bearish market sentiment, with others including imposing margin requirements on offshore yuan trades and using its countercyclical factor in setting the midpoint of the yuan’s daily trade range.

The yuan was exchanging hands at 7.1223 per US dollar on Thursday.