(Bloomberg) -- China's efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that's becoming increasingly scarce outside the nation's borders.
The yuan gained 0.5 percent at 6:48 p.m. in Hong Kong, taking its two-day move to 1.8 percent, poised for its biggest gain in data going back to 2010. The overnight deposit rate in the city rose as high as a record 100 percent, while the spread between the offshore and onshore exchange rates reached the widest since 2010. Bloomberg News earlier reported Chinese policy makers were encouraging state-owned enterprises to sell foreign currency.
Investors are cutting bullish positions in the dollar after the report underscored China's determination to support the yuan, Societe Generale SA said. Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens' conversion quotas and stricter requirements for banks reporting cross-border transactions.
“Given the recent capital controls, the channels for domestic institutions and retails to bring out onshore cash to the offshore market have also been tightened,” said Becky Liu, a rates strategist in Hong Kong at Standard Chartered Plc. “There is a lack of supply of yuan liquidity.”
The currency traded in Shanghai rose 0.6 percent.
Tomorrow next forward points surged to a record as liquidity continued to tighten. In other signs of yuan scarcity, HSBC Holdings Plc raised its three-month yuan deposit rate to 2.85 percent from 1.8 percent, according to the Oriental Daily, while the cost of borrowing yuan overnight in Hong Kong surged by 21.4 percentage points. That's the most since January 2016, when the authorities choked yuan supply to burn speculators betting on declines.
‘Incredibly Aggressive'
“We know the capital controls aren't working because that's why they're having to raise the overnight deposit rate so aggressively by the PBOC, which is still basically the guiding hand in the offshore yuan market,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “It's an incredibly aggressive tactic.”
High short-term funding costs, which will continue to trend higher, could dissuade significant short yuan positions from being added in the near term, Societe Generale strategists led by Jason Daw wrote in a note Thursday.
A rebounding currency would alleviate pressure on Chinese authorities battling to curtail capital outflows after an annual $50,000 quota for citizens to buy foreign exchange reset on Jan. 1 and the imminent inauguration of U.S. President-elect Donald Trump lifts the dollar. Investors have been watching for the yuan to break the psychologically key level of 7 against the greenback for the first time since 2008.
Currency Management
“The weaker dollar overnight should help push the yuan further away from the 7 level for now, aiding the Chinese authorities' recent efforts to stabilize the currency,” said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd. “We expect the authorities to maintain an elevated currency management mode in the run-up to Donald Trump's inauguration on Jan. 20, and until after the Lunar New Year break from Jan. 27 to Feb. 2.”
The offshore yuan's strength will be short-lived because the Hong Kong Monetary Authority may add supply of the currency to lower funding costs, and the dollar could rally, said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. The onshore exchange rate will decline 3.6 percent to 7.15 per dollar by the end of this year, according to the median estimate in a Bloomberg survey.
"Fundamental reasons that are driving depreciation, such as capital outflows and concerns on Trump's China policies, haven't changed," said Qi Gao, a Singapore-based foreign-exchange strategist at Scotiabank.
--With assistance from Emma Dai and Molly Wei To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net, Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly
With assistance from Tian Chen, Kana Nishizawa
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