China is set to issue a record amount of bills in the Hong Kong market, aiming to tighten offshore liquidity and curb speculative attacks against its currency.
The People’s Bank of China (PBOC) announced plans to auction 60 billion yuan ($8.2 billion) of six-month bills in Hong Kong on January 15. This unprecedented issuance aims to absorb excess yuan in the offshore market, elevating its borrowing costs and making it more expensive for traders to short the currency. The move is part of Beijing’s broader strategy to stabilize the yuan, which has been under pressure due to a sluggish domestic economy and ongoing geopolitical tensions, particularly with the United States.
This issuance marks the largest on record since the PBOC began regular bill auctions in Hong Kong in 2018. According to Bloomberg-compiled data, the PBOC’s decision underscores its determination to defend the yuan amid mounting economic challenges and market speculation.
Christopher Wong, a strategist at Oversea-Chinese Banking Corp., commented, “We cannot rule out policymakers deploying even higher funding squeeze in the short term. At this point, the combination of fixing pattern and offshore funding squeeze are intended to guide for a stable yuan.”
The yuan has faced significant downward pressure in recent months. Fears of a sluggish economic recovery and potential US tariff hikes have led to increased market volatility. In response, the PBOC has consistently intervened to stabilize the currency, utilizing daily fixings to maintain a controlled trading range and pledging to prevent excessive fluctuations.
Since the election of Donald Trump in November, the central bank has been particularly vigilant. The PBOC’s daily reference rate, which allows for a 2% movement on either side in onshore trading, has been set at stronger-than-expected levels to boost market confidence. This intervention reflects Beijing’s concern over the potential for disorderly capital outflows, which could trigger a broader financial crisis.
The PBOC’s tactic of issuing bills in Hong Kong serves a dual purpose: immediate stabilization of the yuan and the long-term objective of globalizing the currency. By providing a broader array of yuan-denominated assets, China seeks to enhance the currency’s international appeal and integrate it more deeply into global financial systems.
The announcement of this latest bill issuance initially triggered jitters in the market, pushing the offshore yuan’s overnight Hibor to 8.1%—the highest level since June 2021—before easing in subsequent sessions. This spike in borrowing costs reflects the PBOC’s ability to tighten liquidity effectively, discouraging speculative activity against the yuan.
Despite these measures, analysts warn that the yuan faces continued downside risks. The persistent interest-rate differential between China and the US, coupled with uncertainties surrounding US tariffs, poses a challenge to sustained yuan stability. The currency has already been trading near the lower end of its permitted range, raising concerns about potential liquidity issues.
Wee Khoon Chong, senior APAC market strategist at BNY, noted, “The mopping up of liquidity is likely to keep offshore yuan funding relatively tight in the near-term. However, elevated dollar and ongoing tariff uncertainties are likely to exert downside pressure on the yuan in the near-term.”
The offshore yuan showed modest gains following the announcement, rising 0.1% to 7.3450 per dollar. In the onshore market, the yuan remained steady at 7.3311, hovering near the weak end of its trading range as defined by the day’s fixing.
The issuance of these new bills, scheduled for settlement on January 17, will add to the 140 billion yuan already locked up through previously issued offshore bills set to expire later this year. This strategy of absorbing liquidity is expected to continue, as the PBOC seeks to navigate a delicate balance between supporting the yuan and maintaining overall market stability.
China’s latest move underscores its commitment to defending the yuan against external pressures and speculative attacks. As the global economic environment remains uncertain, the PBOC’s ability to adapt and respond will be critical in shaping the trajectory of the yuan and broader financial markets.
