China’s central bank has instructed several local banks to reduce their external investments utilizing the Bond Connect scheme. The People’s Bank of China (PBOC) has reportedly issued these instructions to curb the flow of the yuan into Hong Kong. The action is intended to limit the availability of yuan in offshore markets.
China controlling offshore yuan
One of the insiders pointed out that by restricting the movement of yuan to offshore markets, there is a potential for tightening offshore yuan liquidity, which could consequently elevate the expense of financing. This individual believes the central bank’s action responds to foreign investors speculating against the yuan.
With a depreciation of around 5% against the dollar so far this year, the central bank’s actions are viewed as components of a larger strategy to safeguard the yuan’s value. Beyond instructing banks to curtail specific types of external investments, China has also initiated measures to amplify the costs of shorting the yuan in offshore contexts.
State-owned banks within China have initiated a process of withdrawing liquidity from the market by reducing their lending to other banks. Simultaneously, they have actively traded sell/buy swaps in the forward market to absorb offshore yuan. Alongside these actions, the escalation of yuan bill sales by China’s central bank in Hong Kong this week has contributed to a tighter liquidity situation in the offshore market. As indicated by a former central banker, this move has played a role in stabilizing the yuan.
Furthermore, reports suggest that the PBOC encourages banks to discontinue their subscription to Negotiable Certificates of Deposit (NCDs) from offshore banks. This step marks another phase in China’s endeavor to regulate the volume of yuan accessible within Hong Kong’s markets. These measures reflect China’s determination to safeguard its currency within the challenging global market landscape.
