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Shorting Chinese yuan costs higher as liquidity tightens in offshore market

Xinhua Financein CFBOND
2018-10-11 16:56

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China's  currency offshore market has been receiving much attention as a main front of short-sellers. The offshore RMB HIBOR has been rising recently. On October 9, the 7-day HIBOR rose 7.6 percent, and one-month HIBOR hit 7.1 percent. Despite the decline in offshore RMB HIBOR of different durations yesterday, it is still higher than the previous months.
At the same time, the onshore renminbi against the US dollar rebounded yesterday, closing at 6.9194 at 16:30 p.m.; as of press time, the offshore renminbi rises 6.93 against the US dollar. Analysts said the tight liquidity on the offshore market led to a rise in short-selling costs and curbed speculation.
Recently, the volatility of the RMB exchange rate has intensified, and but it did not affect the foreign capital’s enthusiasm to investing domestic bonds. According to data disclosed by China Central Depository & Clearing Co., Ltd (CCDC), overseas institutions have increased their holdings of RMB bonds for the 19th consecutive month. As of the end of September, the positions increased by 60.97 percent compared with the same period of last year.
 It’s not an emergency that liquidity tightens in offshore market

In fact, offshore market liquidity started to tighten as early as August. Since mid-August, to curb sell-off sentiment in offshore market, the Chinese government has taken a series of actions, including suspending the three net outflow of Free Trade Accounting Unit (FTU), resuming reverse cycle factor and allowing the People’s Bank of China to issue bills in Hong Kong.
Market participants said that the suspension of FTU means that the main channel for transporting RMB liquidity is blocked, and offshore liquidity tightening is inevitable. The cost of short-selling Chinese yuan will increase.
According to data provider Wind Info, so far, the scale of RMB deposits in the banking industry in Hong Kong has exceeded 600 billion yuan. Forex traders said that once a policy signal emerges, the offshore market will respond quickly.
Such clear stance on policy has frightened speculators. The above-mentioned trader said once offshore HIBOR edges up, speculators will realize that the arbitrage profits from shorting yuan cannot cover operation costs. In addition to fear about two-way fluctuation of RMB’s exchange rate and counter-cycle adjustment, they dare not increase shorting positions.
Guan Tao, senior researcher of China Finance 40 Forum, believed that what decides the long-term trend of exchange rate remains economic fundamentals. Speculators failing in shorting yuan over the past 20 years lied in the fact that they ignored the strong foundation of RMB supported by China’s economic growth.

Foreign capitals increase holdings in yuan-denominated bonds for 19 months
The yuan-denominated bonds are still very attractive to foreign capitals despite RMB’s exchange rate have dropped below several barriers. By the end of September, overseas institutions have entrusted a total of 1,442.298 billion yuan of bonds in CCDC, up by 30.214 billion yuan from the end of August. In spite of the slower growth on a monthly basis, the amount of yuan-denominated bonds held by foreign capitals hit a new high in history.
Foreign capitals have demand for investing in China’s bond in the long run. Foreign exchange reserves of many countries hardly included yuan assets before, Zhao Qingming, chief economist with research institute of China Financial Futures Exchange. “Overseas investors choose to invest in yuan-denominated assets more because of asset allocation and asset diversification. Short-term fluctuation in exchange rate won’t affect foreign institutions’ willingness of investing in China’s bonds.”
CIB Research considered that current policy dividend is one of the major drivers for foreign capitals to buy more yuan-denominated assets. But as policies about arbitrage of yuan are improved, risk of exchange rate can be hedged to some extent. As a result, foreign investment in yuan-denominated assets will be blocked by exchange rate less and less.
“Foreign capitals increasing holdings in yuan-denominated bonds is a positive signal, meaning that they are increasingly interested in China market.” said a head from a large foreign institution.
Translated by Coral Zhong  & Vanessa Chen
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