Banks' Borrowing Rate for Yuan in Hong Kong Hits Record

The rate at which banks charge each other to borrow yuan in Hong Kong surged to a record high Tuesday with speculation China's central bank was buying huge amounts of the unit to fend off speculators.

The overnight Hong Kong Interbank Offered Rate (HIBOR) for the offshore yuan jumped 53 percentage points to almost 67 percent owing to tight liquidity. The one-week rate also surged, to 33.8 percent from 11.2 percent.

The surge comes as traders around the world grow increasingly worried about the state of China's economy, a key driver of global growth, as it suffers a painful growth slowdown that has sent markets into turmoil.

Beijing's decision last week to lower the value of the yuan against the dollar to a five-year low added to concerns, with the leadership's handling of the crisis being called into question.

This in turn has caused heavy selling of the Chinese unit, leading the People's Bank of China to step in to buy yuan and sell dollars, tightening liquidity.

Albert Leung, a Hong Kong-based rates strategist at Nomura Holdings said: "The PBOC's suspected intervention in the offshore currency market further tightened the liquidity. Yuan interest rates are expected to remain highly volatile in the next couple of days."

The move lifted the yuan's value in Hong Kong, where it is more freely traded than on the mainland. Last week it was almost three percent below its rate in Shanghai.

"It's a conscious effort to make funding costs high for speculators," Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia, told Bloomberg News.

"The Hong Kong Monetary Authority is notably absent from the market. They're trying to help the PBOC achieve its objective of converging the yuan spot rates."