Bills sale plan bolsters yuan

Business | Reuters 22 May 2019

China's central bank said yesterday it will issue yuan-denominated bills in Hong Kong in the near future, in a move analysts said was designed to tighten offshore liquidity to stabilise the weakening currency.

The announcement came after the People's Bank of China sold 20 billion yuan (HK$22.73 billion) of bills in Hong Kong last week. The central bank had tapped the market every three months with the same deal size and structure since November.

The expected "off-cycle" issuance "is a clear indication that the PBoC wants to defend 7" per dollar handle, said one Hong Kong-based trader.

The yuan has weakened almost 3 percent this month and the central bank said last week it will ensure that the currency does not breach the 7 per dollar level in the immediate term.

By soaking up yuan funds in Hong Kong, PBoC's bills could increase interest rates in the offshore yuan market, making it more expensive for speculators to bet on a weakening yuan.

Issuing bills that mature in less than three months, which are the shortest-dated of such yuan bills so far, "would send a stronger policy signal in support of spot (yuan)," said Ken Cheung, senior Asian FX strategist at Mizuho.

The offshore yuan rallied about 100 basis points after the announcement, and was last quoted at 6.9368 per dollar.

The PBoC also issued details of the three phases in which it plans to cut the reserve requirement ratio (RRR) for county-level rural commercial banks. The cut aims to free up about 280 billion yuan ($40.53 billion) for such banks.

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