(Yicai Global) June 1 -- The yuan rose sharply against the US dollar yesterday. The onshore and offshore yuan hit new post-November highs of 6.8182 and 6.7634 against the dollar, respectively. The price spread between the mainland China and Hong Kong markets grew by more than 500 points.
After Moody's downgraded the credit ratings of mainland China and Hong Kong last week, major Chinese banks cracked down on short selling in the A-share and yuan markets, increasing short-sellers' cost to close, leading to short-term market tensions that drove up the short-term interest rate of offshore yuan for days, analysts said.
"The short-term interest rate of the offshore yuan is expected to stay high, and it may be difficult for the overnight rate to remain high for a long time -- maybe two weeks at most," said Tommy Ong, managing director of Treasury and Markets Department of DBS Bank. There are few short positions for offshore yuan in the market and the yuan-dollar exchange rates have gone from 6.9 to 6.8, he said. "I believe that the People's Bank of China (PBOC) does not want to see the yuan get too strong and will intervene less."
Major Chinese banks have intervened after Moody's downgraded the credit ratings of mainland China and Hong Kong, said Liu Jie, macro strategy analyst from Standard Chartered Bank China Ltd. "They bought yuan while selling dollars and did not inject liquidity in the market. It is estimated that some banks need short money and have to borrow funds, but the whole market is still working properly."
A countercyclical factor will be added to the yuan's central parity pricing mechanism,
PBOC said last week without providing details.
"I believe that the sharp rise of yuan's short-term interest rate is related to the adjustment of yuan's central parity quotation mechanism by China Foreign Exchange Trade System," said Ying Jian, senior economic researcher at Bank of China (Hong Kong) Ltd. "Since the impact of the depreciation of the US dollar after the New Year has not yet been reflected in the changes in offshore yuan, the new mechanism may guide the appreciation of yuan, thus stimulating investors to buy yuan. It may also increase the demand for yuan in foreign markets to raise the price of funds."
"The intention of Chinese authorities to curb the devaluation of yuan is obvious," Khoon Goh, director of Asian studies at ANZ Bank in Singapore, wrote in a report. "In view of the short-term dollar weakness and China's measures to prevent the outflow of funds, the exchange rate of onshore yuan against dollar is forecasted to be raised to 6.95 from 7.10 till the end of this year."