Offshore Yuan's Widening Discount Raises PBOC Intervention Risks

The widest spread between the yuan’s rates at home and overseas since February is spurring concern China’s central bank will step in to narrow the gap.

The offshore discount provides a window for speculators to profit by buying the currency in Hong Kong and selling it in Shanghai, a practice that the People’s Bank of China has sought to stamp out repeatedly since the yuan’s devaluation in August last year.

The difference between the two rates swelled to 0.6 percent, or 394 so-called pips, late on Wednesday, as the onshore yuan surged against a declining dollar. The Shanghai rate jumped 0.41 percent, outpacing the offshore currency’s 0.14 percent advance. The offshore yuan fell 0.24 percent to 6.5436 a dollar as of 5:14 p.m. on Thursday, while the onshore rate dropped 0.32 percent to 6.5127.

“The authorities will get uncomfortable if the gap widens further and sustains, said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Hong Kong. “I’d say the authorities may get more aggressive should the gap widen above 500 pips.”

The PBOC has been fighting to drive out speculators who take advantage of the market mismatch, which exists because China restricts cross-border capital flows. The gap surged to a record 2.9 percent in early January before the monetary authority cracked down by mopping up the currency’s supply offshore and restricting mainland banks from moving yuan overseas. Policy makers are studying several tools, including a tax to help curb speculative currency trading, the nation’s currency regulator said in March.

The central bank raised the yuan’s daily reference rate by 0.38 percent on Thursday, the most in two weeks, after a gauge of dollar strength retreated 0.4 percent overnight. The greenback rallied on Thursday, extending this month’s gains to 1.6 percent.

A Bloomberg replica of the CFETS RMB Index, which the PBOC uses to track the yuan against 13 currencies, rose for the seventh straight day, the longest run of gains since the gauge was introduced in December.

“The index rose because of broad dollar strength -- components in the basket are weakening against the greenback faster than the yuan is,” said Gao Qi, a strategist at Scotiabank in Hong Kong. “The PBOC will not want to see a very wide onshore-offshore gap, because that will lead to market concerns and capital outflows. So if the gap continues to widen, the PBOC will likely take some action to narrow the difference. A gap of 400 pips can be seen as quite wide and 500 pips could be a resistance level."

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly