(Bloomberg) -- China expanded its support for the beleaguered yuan with a plan to issue a record amount of bills in the Hong Kong market to mop up excess liquidity.
The People’s Bank of China will auction 60 billion yuan ($8.2 billion) of six-month bills in the city on Jan. 15, the Hong Kong Monetary Authority said in a statement. The issuance will effectively increase demand for the yuan in offshore markets, making it more costly to borrow and short the currency.
The issuance is set to be the largest on record since the central bank started bill auctions in Hong Kong regularly in 2018, according to Bloomberg-compiled data.
The yuan’s tumble in recent months, spurred by a sluggish Chinese economy and potential US tariff hikes, has traders pondering the PBOC’s commitment to defend the currency. The central bank has so far remained firmly supportive of stability, as it propped up the yuan with its daily fixings while also pledging to prevent an overshoot in exchange rates.
“We cannot rule out policymakers deploying even higher funding squeeze in the short term,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. “At this point, the combination of fixing pattern and offshore funding squeeze are intended to guide for a stable yuan.”
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The additional bill issuance in Hong Kong is a tactic that the PBOC deployed multiple times before and it was last used in 2023. Offering broader choices of yuan assets in the city also serves Beijing’s long-term ambition to globalize the currency.
Jitters over tighter liquidity pushed up gauges of the yuan’s borrowing costs in Hong Kong to levels unseen in years earlier this week, before they eased. The offshore yuan’s overnight Hibor fell after rising to 8.1% on Tuesday, the highest since June 2021.
This is the first time that the PBOC is issuing offshore bills in months without maturities, which shows its clear purpose to defy further yuan depreciation in the near term, said Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong. “Offshore yuan liquidity condition will likely to stay tight for an extended period post Donald Trump’s inauguration or even post Lunar New Year till early February.”
The PBOC had been mainly using its daily reference rate to support the yuan, particularly as the dollar soared following Trump’s victory in the US election. The central bank again set the so-called fixing, which limits the currency’s moves by 2% on either side in onshore trading, at a level that was significantly stronger than forecast on Thursday.
That’s because Beijing fears disorderly capital outflows can trigger a panic selloff in yuan-denominated assets and derail an already lackluster recovery. Analysts still expect the currency to weaken this year due to factors including a yawning interest-rate discount to the US.
However, the PBOC’s strategy to prioritize yuan stability carries a cost, as it opens up the prospect of trading glitches or thin liquidity the closer the currency comes to its permitted limit. On Wednesday, the yuan weakened to trade close to the policy no-go area.
“The mopping up of liquidity is likely to keep offshore yuan funding relatively tight in the near-term,” said Wee Khoon Chong, senior APAC market strategist at BNY. However, “elevated dollar and the on-going tariff uncertainties is likely to exert downside pressure on the yuan in the near-term.”
The offshore yuan gained 0.1% to 7.3486 per dollar on Thursday, following the announcement of central bank bill sales. In the onshore market, the currency was little changed at 7.3315, close to the weak end of its trading range at 7.3323 as defined by the day’s fixing.
As of Jan. 9, the central bank has 140 billion yuan locked up through previously-sold offshore yuan bills that expire later this year, data compiled by Bloomberg show. The settlement date for the bills to be issued next week will be on Jan. 17.
--With assistance from Betty Hou and Iris Ouyang.
(Updates with more comments.)
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