Yuan borrowing costs for banks in Hong Kong have risen sharply for the second time in just over a month, as a recent spate of issuances of offshore yuan-denominated bonds, known as dim-sum bonds, is draining yuan from circulation in the city.
Analysts are forecasting the liquidity squeeze will continue in the nascent offshore market for China’s currency. More bond offers are expected later this year, while the growth in the pool of offshore yuan is expected to slow as the Chinese currency’s drop against the dollar this year deters investors.
The shortage of yuan is pushing up the amount banks charge each other to borrow in the currency, with the overnight rate rising to 3.4 percent Thursday, from as much as 3 percent Wednesday and as high as 2 percent last week, which was the average level in recent weeks, according to currency traders.
A similar rise in funding costs hit the market in late June when China’s Ministry of Finance sold a 23 billion yuan ($3.6 billion) sovereign bond in the city, which sucked cash out of the system. Overnight borrowing rates rose then to as high as 6 percent, forcing foreign banks to rush to the swap market for alternative yuan funding, according to Deutsche Bank.
Large issues of dim-sum bonds to come later this year include those from lenders like Agricultural Bank of China Ltd, which has received approval from China’s top economic planning agency to raise capital using this type of debt, as well as from four large state-run companies, including Huaneng Power International Inc. and China Datang Corp., which secured quotas to issue a combined 18.5 billion yuan of bonds.
The issuance of offshore yuan bonds, including certificates of deposits that allow banks to tap short-term funds, climbed to 25.8 billion yuan in July, making it the fourth-strongest month for issues so far this year, according to HSBC Holdings PLC. -By Fiona Law
Category: Hong Kong